As filed with the Securities and Exchange Commission on February 7, 2003
Registration No. 333-8502
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------
POST-EFFECTIVE AMENDMENT NO. 1
TO
REGISTRATION STATEMENT
Under
SCHEDULE B
OF
THE SECURITIES ACT OF 1933
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THE REPUBLIC OF KOREA
(Name of Registrant)
-----------------
Name and address of Authorized Representative in the United States:
Hi-Su Lee
Consul
Korean Consulate General
335 East 45/th/ Street
New York, New York 10017
United States of America
It is requested that copies of notices and communications from the
Securities and Exchange Commission be sent to:
Jinduk Han, Esq. Mark A. Walker, Esq.
Cleary, Gottlieb, Steen & Cleary, Gottlieb, Steen &
Hamilton Hamilton
Bank of China Tower One Liberty Plaza
One Garden Road New York, New York 10006
Hong Kong United States of America
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Approximate date of commencement of proposed sale to the public: From time
to time after this Registration Statement becomes effective.
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The Securities registered hereby will be offered on a delayed or continuous
basis pursuant to the procedures set forth in the Securities Act Release Nos.
33-6240 and 33-6424.
-----------------
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933, as amended, or until the Registration Statement
shall become effective on such date as the Securities and Exchange Commission,
acting pursuant to said Section 8(a), may determine.
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EXPLANATORY NOTE
This registration statement relates to US$5,000,000,000 aggregate principal
amount of debt securities of The Republic of Korea to be offered from time to
time as separate issues on terms and in the manner to be specified in a
prospectus supplement to be delivered in connection with each such offering.
The prospectus constituting a part of this registration statement relates to
the debt securities registered under this registration statement, of which The
Republic of Korea has sold an aggregate principal amount of US$4,000,000,000 of
debt securities as part of two issues designated US$1,000,000,000 Notes due
April 15, 2003 and US$3,000,000,000 Bonds due April 15, 2008.
The information in this prospectus is not complete and may be changed. The
Republic may not sell these securities until the registration statement filed
with the Securities and Exchange Commission is effective. This prospectus is
not an offer to sell these securities and it is not soliciting an offer to buy
these securities in any state where the offer or sale is not permitted.
SUBJECT TO COMPLETION. DATED FEBRUARY 7, 2003.
PROSPECTUS
[LOGO]
The Republic of Korea
US$5,000,000,000
Debt Securities
The Republic may offer up to US$5,000,000,000 of its debt securities for
sale from time to time based on information contained in this prospectus and
various prospectus supplements. The debt securities will be direct,
unconditional and unsecured external indebtedness of the Republic and will at
all times rank at least equally with all other unsecured and unsubordinated
external indebtedness of the Republic.
The Republic will provide specific terms of these securities in one or more
supplements to this prospectus. You should read this prospectus and any
prospectus supplement carefully before you invest. This prospectus may not be
used to make offers or sales of debt securities unless accompanied by a
prospectus supplement.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if
this prospectus is truthful or complete. Any representation to the contrary is
a criminal offense.
The date of this prospectus is , 2003.
TABLE OF CONTENTS
CERTAIN DEFINED TERMS AND
CONVENTIONS............................ 3
USE OF PROCEEDS.......................... 4
THE REPUBLIC OF KOREA.................... 5
Land and History...................... 5
Government and Politics............... 6
The Economy........................... 8
Gross Domestic Product and Major
Financial Indicators................ 22
Balance of Payments and Foreign Trade. 30
The Financial System.................. 34
Monetary Policy....................... 38
Government Finance.................... 41
Debt.................................. 42
Tables and Supplementary Information.. 45
DESCRIPTION OF THE DEBT
SECURITIES............................. 48
General Terms of the Debt Securities.. 48
Payments of Principal, Premium and
Interest............................ 49
Repayment of Funds; Prescription...... 49
Global Securities..................... 49
Additional Amounts.................... 51
Status of Debt Securities............... 51
Negative Pledge Covenant................ 52
Events of Default....................... 53
Modifications and Amendments; Debt
Securityholders' Meetings............. 54
Fiscal Agent............................ 55
Further Issues of Debt Securities....... 55
Governing Law, Jurisdiction, Consent to
Service and Enforceability............ 55
LIMITATIONS ON ISSUANCE OF BEARER
DEBT SECURITIES.......................... 57
TAXATION................................... 58
Korean Taxation......................... 58
United States Tax Considerations........ 59
PLAN OF DISTRIBUTION....................... 66
LEGAL MATTERS.............................. 67
AUTHORIZED REPRESENTATIVES IN THE
UNITED STATES............................ 67
OFFICIAL STATEMENTS AND
DOCUMENTS................................ 67
FORWARD-LOOKING STATEMENTS................. 67
FURTHER INFORMATION........................ 68
2
CERTAIN DEFINED TERMS AND CONVENTIONS
Unless the context otherwise requires, all references to "Korea" or the
"Republic" contained in this prospectus are to The Republic of Korea. All
references to the "Government" are to the government of Korea.
Unless otherwise indicated, all references to "won", "Won" or "(Won)"
contained in this prospectus are to the currency of Korea, and references to
"U.S. dollars", "Dollars", "$" or "US$" are to the currency of the United
States of America.
The fiscal year of the Republic ends on December 31 of each year. The fiscal
year ended December 31, 2002 is referred to in this prospectus as "2002", and
other fiscal years are referred to in a similar manner.
Totals in some tables in this prospectus may differ from the sum of the
individual items in those tables due to rounding.
3
USE OF PROCEEDS
Unless otherwise specified in a prospectus supplement, the net proceeds from
the sale of the debt securities will become part of the Foreign Exchange
Stabilization Fund established and managed under the Korean Foreign Exchange
Transaction Act. The Foreign Exchange Stabilization Fund is used for:
. selling and purchasing foreign currency;
. depositing or lending to The Bank of Korea, foreign governments, foreign
central banks or other financial institutions inside and outside of Korea;
. guaranteeing debt incurred by The Bank of Korea, Korean institutions
authorized to engage in foreign exchange business or foreign financial
institutions in connection with foreign currency transactions; and
. temporarily paying on behalf of the Government foreign currency debt
incurred by Korean institutions authorized to engage in foreign exchange
business and guaranteed by the Government until payment is made by the
Government using a contingency fund or supplementary budget pursuant to
the Foreign Exchange Transaction Act.
4
THE REPUBLIC OF KOREA
Land and History
Territory and Population
Located generally south of the 38th parallel on the Korean peninsula, The
Republic of Korea covers about 38,000 square miles, approximately one-fourth of
which is arable. The Republic's population of approximately 48 million has a
literacy rate of approximately 98%. The country's largest city and capital,
Seoul, has a population of about 11 million people.
Political History
Dr. Rhee Syngman, Korea's elected president in 1948, 1952, 1956 and 1960,
dominated the years after the Republic's founding in 1948. Shortly after
President Rhee's resignation in 1960 in response to student-led demonstrations,
a group of military leaders headed by Park Chung Hee assumed power by coup. The
military leaders established a civilian government, and the country elected Mr.
Park as President in October 1963. President Park served as President until his
assassination in 1979 following a period of increasing strife between the
Government and its critics. The Government declared martial law and formed an
interim government under Prime Minister Choi Kyu Hah, who became the next
President. After clashes between the Government and its critics, President Choi
resigned, and General Chun Doo Hwan, who took control of the Korean army,
became President in 1980.
In late 1980, the country approved, by national referendum, a new
Constitution, providing for indirect election of the President by an electoral
college and for certain democratic reforms, and shortly thereafter, in early
1981, re-elected President Chun. Responding to public demonstrations in 1987,
the legislature revised the Constitution to permit direct election of the
President. In December 1987, Roh Tae Woo won the Presidency by a narrow
plurality, after opposition parties led by Kim Young Sam and Kim Dae Jung
failed to unite behind a single candidate. In February 1990, two opposition
political parties, including the one led by Kim Young Sam, merged into
President Roh's ruling Democratic Liberal Party.
In December 1992, the country elected Kim Young Sam as President. The
election of a civilian and former opposition party leader considerably lessened
the controversy concerning the legitimacy of the political regime. President
Kim's administration reformed the political sector and deregulated and
internationalized the Korean economy.
In December 1997, the country elected Kim Dae Jung as President. President
Kim's party, the Millennium Democratic Party (formerly known as the National
Congress for New Politics), formed a coalition with the United Liberal
Democrats led by Kim Jong Pil, with Kim Jong Pil becoming the first prime
minister in President Kim's administration. The coalition, which temporarily
ended before the election held in April 2000, continued with the appointment of
Lee Han Dong of the United Liberal Democrats as the Prime Minister in June
2000. The coalition again ended in September 2001.
In December 2002, the country elected Roh Moo Hyun of the Millennium
Democratic Party as the Republic's next President, and he will begin his term
on February 25, 2003. The new administration has expressed its intention to
maintain key policy priorities in line with those of the current
administration. These include:
. pursuing a flexible macroeconomic policy mix to ensure stable economic
growth through balanced growth in domestic demand and exports;
. nurturing emerging industries, encouraging research and development, and
improving logistical infrastructure to maximize economic growth potential;
5
. expanding the economic participation of women and the elderly, while
establishing a sustainable social welfare system that is consistent with
recent socio-economic progress;
. continuing structural reforms that will result in a transparent
market-driven economy;
. continuing with inter-Korean cooperation; and
. continuing with efforts to resolve the North Korea nuclear issue
peacefully through various diplomatic channels.
Government and Politics
Government and Administrative Structure
Governmental authority in the Republic is centralized and concentrated in a
strong presidency. The President is elected by popular vote, serves for a term
of five years and may not be re-elected. The President chairs the State
Council, which consists of the prime minister, the deputy prime ministers, the
respective heads of Government ministries and the ministers of state. The
President can select the members of the State Council and appoint or remove all
other Government officials, except for local officials elected in local
elections.
The President can veto new legislation and take emergency measures in cases
of natural disaster, serious fiscal or economic crisis, state of war or other
similar circumstances. The President must promptly seek the concurrence of the
National Assembly for any emergency measures taken; failing to do so
automatically invalidates the emergency measures.
The National Assembly exercises the country's legislative power. The
Constitution provides for the direct election of about 85% of the members of
the National Assembly and the distribution of the remaining seats
proportionately among parties winning over 3% of the popular vote. National
Assembly members serve four-year terms. The National Assembly enacts laws,
ratifies treaties and approves the national budget. The executive branch drafts
most legislation and submits it to the National Assembly for approval.
The country's judicial branch comprises the Supreme Court, the
Constitutional Court and lower courts of various levels. The President appoints
the Chief Justice of the Supreme Court and appoints the other Justices of the
Supreme Court upon the recommendation of the Chief Justice. All appointments to
the Supreme Court require the consent of the National Assembly. The Chief
Justice, with the consent of the other Supreme Court Justices, appoints all the
other judges in Korea. Supreme Court Justices serve for six years; all other
judges serve for ten years. Other than the Chief Justice, justices and judges
may be reappointed to successive terms.
The President formally appoints all nine judges of the Constitutional Court,
but three judges must be designated by the National Assembly and three by the
Chief Justice of the Supreme Court. Constitutional Court judges serve for six
years and may be reappointed to successive terms.
Administratively, the Republic comprises nine provinces and seven cities
with provincial status: Seoul, Busan, Daegu, Inchon, Gwangju, Daejon and Ulsan.
From 1961 to 1995, the national government controlled the provinces and the
President appointed provincial officials. Local autonomy, including the
election of provincial officials, was reintroduced in June 1995.
Political Organizations
Currently, there are two main political parties, the Grand National Party
("GNP") and the Millennium Democratic Party ("MDP"), which is the current
ruling party.
6
As of December 31, 2002, the parties controlled the following number of
seats in the National Assembly:
GNP MDP Others Total
--- --- ------ -----
Number of Seats 151 103 18 272
Relations with North Korea
Relations between the Republic and North Korea have been tense over most of
the Republic's history. The Korean War of 1950-1953 began with the invasion of
the Republic by communist forces from North Korea and, following a military
stalemate, resulted in an armistice establishing a demilitarized zone monitored
by the United Nations in the vicinity of the 38th parallel.
North Korea maintains a regular military force estimated at more than
1,000,000 troops, mostly concentrated near the northern border of the
demilitarized zone. The Republic's military forces, composed of approximately
690,000 regular troops and almost 3.1 million reserves, maintain a state of
military preparedness along the southern border of the demilitarized zone. The
United States currently maintains approximately 37,000 troops in the Republic.
Over the last few years, relations between the Republic and North Korea have
generally improved, despite occasional difficult periods, such as the June 1999
and June 2002 incidents during which several North Korean naval ships intruded
on the northern boundary of the Republic's territorial waters, resulting in a
series of hostile naval clashes, and the recent events relating to North
Korea's nuclear program discussed below. The Government believes that recent
general improvement in relations between the Republic and North Korea have
stemmed from expectations of increased economic cooperation. Trade between the
two Koreas, which totaled US$287 million in 1995, has increased to US$403
million in 2001. In November 1998, the Hyundai Group began operating tours for
South Koreans to visit the Mount Kumgang region of North Korea after reaching
an agreement for such tours with the North Korean government. In June 2000,
President Kim Dae Jung met with North Korea's leader Kim Jong-Il in Pyongyang,
North Korea. The summit meeting between the leaders of the Republic and North
Korea was the first since the nation was divided in 1945. After four rounds of
the summit meeting, President Kim Dae Jung and North Korea's leader Kim Jong-Il
jointly announced in June 2000 an accord calling for the following points: (1)
the autonomous pursuit of unification; (2) the reunion of separated families;
(3) the promotion of economic cooperation and exchange in various fields; and
(4) the continuation of dialogue to implement the accord. Since the summit,
nine rounds of ministerial talks have been held through January 2003.
In recent months, however, the level of tension between the two Koreas, as
well as between North Korea and the United States, has increased. In response
to North Korea's admission to the maintenance of a nuclear weapons program in
breach of the peace accord executed in October 1994, the United States, Japan,
the Republic and the European Union (which became party to the 1994 accord in
November 2002) decided to suspend shipments of oil to North Korea called for by
the 1994 accord and reiterated their demands for the dismantling of North
Korea's nuclear weapons program. Following the suspension of oil shipments,
North Korea removed seals and surveillance equipment from its Yongbyon nuclear
power plant and evicted nuclear inspectors from the United Nations
International Atomic Energy Agency in December 2002. Media reports have stated
that North Korea has resumed activation of its Yongbyon nuclear power plant. In
January 2003, North Korea announced its intention to withdraw from the Nuclear
Non-Proliferation Treaty, refusing to abandon its nuclear power and arms
program unless the United States were to execute a non-aggression pact. In an
effort to secure a peaceful negotiated resolution to these events, the two
Koreas continue to hold ministerial talks. In addition, the United States and
Japan have reaffirmed their commitment to supporting such efforts through
diplomatic channels. However, there can be no assurance that the level of
tension will not escalate to have a material adverse impact on the Republic or
its economy.
Over the longer term, reunification of the two Koreas could occur.
Reunification may entail a significant economic commitment by the Republic.
7
Foreign Relations and International Organizations
The Republic maintains diplomatic relations with most nations of the world,
most importantly with the United States with which it entered into a mutual
defense treaty and several economic agreements. The Republic also has an
important relationship with Japan, its largest trading partner after the United
States.
The Republic belongs to a number of supranational organizations, including:
. the International Monetary Fund (the "IMF");
. the World Bank;
. the Asian Development Bank (the "ADB");
. the Multilateral Investment Guarantee Agency;
. the International Finance Corporation;
. the International Development Association;
. the African Development Bank;
. the European Bank for Reconstruction and Development;
. the Bank for International Settlements; and
. the World Trade Organization (the "WTO").
In September 1991, the Republic and North Korea became members of the United
Nations. During the 1996 and 1997 terms, the Republic served as a non-permanent
member of the United Nations Security Council.
In March 1995, the Republic applied for admission to the Organization for
Economic Cooperation and Development (the "OECD"), which the Republic
officially joined as the twenty-ninth regular member in December 1996.
The Economy
Economic Developments since 1997
In 1997 and 1998, a number of developments described below adversely
affected the Korean economy. Korean companies, including the conglomerates
known as "chaebols" that dominate the Korean economy, banks and other financial
institutions struggled financially, and a number of them failed. Factors that
contributed to the financial difficulties included excessive investment by
Korean companies and high levels of debt, including debt denominated in foreign
currencies, incurred by Korean companies. The economic difficulties of certain
Southeast Asian countries beginning in 1997 also contributed to Korea's
problems. During this period, the Republic experienced significant depreciation
of the Won, increases in interest rates, volatile stock prices, as well as
reductions in its foreign currency reserves and reduced liquidity in the
economy. Reflecting these factors, in 1998, GDP contracted by 6.7% at constant
market prices, the inflation rate rose to 7.5% from 4.4% in 1997 and the
unemployment rate rose to 6.8% from 2.6% in 1997.
However, the Korean economy recovered after 1998 and achieved an increase in
GDP of 10.9% in 1999 at constant market prices. In addition, the Republic
recorded a trade surplus of US$23.9 billion in 1999 as the Republic's economic
recovery led to a 28.4% increase in imports and a 8.6% increase in exports. The
Republic recorded GDP growth of 9.3% and a trade surplus of US$11.8 billion in
2000, and GDP growth of 3.0%, based on preliminary data, and a trade surplus of
US$9.3 billion in 2001. Based on preliminary data, the Republic recorded a
trade surplus of US$10.8 billion in 2002. At the same time, inflation has been
managed at relatively low levels of 0.8% in 1999, 2.2% in 2000, 4.1% in 2001
and 2.7% in 2002. Moreover, the unemployment rate has continued to decrease in
each year since 1998, to 6.3% in 1999, 4.1% in 2000, 3.7% in 2001 and 3.0% in
2002.
8
The following table sets forth information regarding certain of the
Republic's key economic indicators for the periods indicated.
As of or for the year ended December 31,
- ------------------------------------------------------------------------
1997 1998 1999 2000 2001(1) 2002(1)
----------- ----------- ----------- ----------- ----------- -------
(In billions of dollars and trillions of won, except percentages)
GDP Growth(2)............ 5.0% (6.7)% 10.9% 9.3% 3.0% N.A.
Inflation................ 4.4% 7.5% 0.8% 2.2% 4.1% 2.7%
Unemployment(3).......... 2.6% 6.8% 6.3% 4.1% 3.7% 3.0%
Trade Surplus............ $(8.5) $39.0 $23.9 $11.8 $9.3 $10.8
Foreign Currency Reserves $8.9 $48.5 $74.1 $96.2 $102.8 $121.4
External Liabilities..... $159.2 $148.7 $137.1 $131.7 $118.8 $131.0
Fiscal Balance........... (Won) (7.0) (Won) (18.8) (Won) (13.1) (Won) 6.5 (Won) 7.3 N.A.
- --------
(1) Preliminary.
(2) At constant market prices.
(3) Average for year.
The Republic's economic and financial difficulties in 1997 and 1998 and its
subsequent recovery are described in more detail below.
Financial Condition of Korean Companies
Beginning in early 1997, a significant number of Korean companies, including
member companies of chaebol groups, experienced financial difficulties due to
excessive investment in some industries, weak export prices and high levels of
debt and foreign currency exposure. In addition, the widespread practice of
cross guarantees within chaebols meant that the difficulties of financially
weaker companies threatened stronger ones as well. The reluctance and reduced
ability of banks to renew or extend additional credit exacerbated these
problems.
Beginning in early 1997, a number of significant Korean companies failed,
including companies in the Hanbo Group, the Sammi Group, the Kia Group, the
Jinro Group, the Dainong Group, the Ssang Bang Wool Group, the New Core Group,
the Tae-il Precision Group and the Halla Group. The series of major corporate
failures in 1997 and 1998 contributed to increases in the Republic's
unemployment rate, which rose to 8.5% as of January 31, 1999, but decreased to
3.0% as of December 31, 2002.
In August 1999, Korean creditor financial institutions of the Daewoo Group
agreed to enter into voluntary workout programs for twelve companies of the
Daewoo Group. By the end of February 2000, these creditors approved the workout
programs, which included spin-offs of certain Daewoo Group companies,
debt-for-equity swaps, deferrals of principal and interest payments, reduction
of interest rates and provision of new credits by existing creditors. In
addition, by March 2000, The Korea Asset Management Corporation ("KAMCO")
reached an agreement in principle with foreign creditor financial institutions
of certain Daewoo Group companies to purchase their claims. An offer to
purchase the claims of foreign creditors was commenced in May 2000, and
approximately US$3.9 billion, or over 90% of eligible claims, was purchased by
KAMCO by October 2000. By December 2000, Daewoo Corporation and Daewoo Heavy
Industries Ltd. spun off their respective operations to newly established
operating companies pursuant to their workout programs. In August 2001, Korean
creditor financial institutions of Daewoo Shipbuilding & Marine Engineering
Co., Ltd., which spun off from Daewoo Heavy Industries, approved an early exit
from the workout program. However, the workout programs for the other Daewoo
Group companies are continuing, and a number of individual, non-financial
institution creditors and minority shareholders of Daewoo Group companies are
challenging various aspects of the workout programs. Further, Daewoo Motor Co.,
Ltd., Korea's second-largest automobile manufacturer, went under court
receivership in November 2000 after it had failed to obtain additional loans
from its main creditor banks and defaulted on its short-term payment of
obligations. As the key element of the restructuring of Daewoo Motor, GM-Daewoo
Auto and Technology ("GMDAT") was established in August 2002 pursuant to a
master
9
agreement between General Motors Corporation ("GM") and certain creditors of
Daewoo Motor. In October 2002, GMDAT acquired certain assets of Daewoo Motor,
and GMDAT commenced operation as a result of a final agreement reached by GM
and the creditors. According to the master agreement, GM and GM's affiliates
ultimately will own 67% of GMDAT and the creditors will own the remaining 33%.
Pursuant to an agreement between GM and the creditors, the creditors agreed to
extend US$2 billion in additional loans to GMDAT and certain creditors,
including The Korea Development Bank, Woori Bank, Chohung Bank and Korea
Exchange Bank, have agreed to provide loans to GMDAT at market interest rates
and trade finance facilities in the aggregate amount of US$1.25 billion,
including US$750 million in loans from The Korea Development Bank, which is
wholly-owned by the Government.
In addition to the uncertainties concerning the prospects of the
restructuring of the Daewoo Group companies discussed above, the possibility of
financial difficulties for other conglomerates as well as Korean financial
institutions may negatively affect the Korean economy. For example, the Hyundai
Group has been reported to be struggling with its indebtedness, reported to
amount to approximately US$30 billion, and Hyundai Group's Hyundai Engineering
& Construction Co., Ltd. and Hynix Semiconductor Inc. (formerly known as
Hyundai Electronics Industries Co., Ltd. and disaffiliated from Hyundai Group
since June 2001) have been reported to be experiencing liquidity problems. In
March, May and September 2001, creditor financial institutions of the Hyundai
Group agreed to provide financial assistance by way of additional loans,
extensions on maturities of various outstanding payment obligations,
debt-for-equity swap transactions, guarantees of repayment obligations of
overseas borrowings and injections of additional capital into the Hyundai Group
companies. In addition, The Korea Development Bank established the "Fast Track
Debenture Program" to support the corporate debenture market. Hyundai
Engineering & Construction and Hynix Semiconductor were selected as companies
to be included in this program, which commenced in January 2001 and ended in
January 2002. Under this bond purchase program, selected companies became
eligible to refinance through The Korea Development Bank up to 80% of the
principal amount of their debentures maturing in 2001 through the issuance of
new debentures to The Korea Development Bank at market interest rates. Despite
a US$1.25 billion equity offering completed in June 2001, Hynix Semiconductor
has been reported to continue to have financial difficulties. In October 2001,
creditor financial institutions of Hynix Semiconductor decided to subject it to
the Corporate Restructuring Promotion Act, which became effective in September
2001. The Corporate Restructuring Promotion Act allows creditor financial
institutions of a troubled company to freeze and reschedule its debts
(including provision of new credits) upon a resolution by the creditors
representing at least 75% of the entire claims amount as part of efforts to
sustain its operations. In June 2002, the creditor banks converted (Won)3.1
trillion in principal amount of Hynix Semiconductor convertible bonds into
equity. As a result, the creditor banks now control Hynix Semiconductor. The
creditor banks are reportedly considering a wide range of options with respect
to Hynix Semiconductor. In November 2002, an agreement was signed among Hynix
Semiconductor, Hyundai Display Technology, Inc. (a subsidiary of Hynix
Semiconductor) and Beijing Orient Electronics Group with respect to the sale of
Hyundai Display Technology's TFT-LCD business for US$380 million. The creditor
banks of Hynix Semiconductor agreed to extend US$180 million in loans,
including US$100 million from The Korea Development Bank, to Beijing Orient
Electronics Group in connection with its acquisition of the TFT-LCD business.
The extension of the loans and closing of the sale and purchase of the TFT-LCD
business was completed in January 2003. In December 2002, the creditor banks of
Hynix Semiconductor approved a plan that includes a 21:1 reverse stock split
followed by a (Won)1.9 trillion debt-for-equity swap and a rollover to the end
of 2006 of (Won)3.0 trillion of Hynix Semiconductor's debt. The plan
subsequently was approved by Hynix Semiconductor's board of directors in
January 2003.
The Government and the private sector have worked together to implement
major reforms in the corporate sector. As part of the corporate sector response
to the financial crisis, all forms of mergers and acquisitions, including
hostile takeovers, were liberalized in May 1998. The government also required
each of the 64 largest chaebol groups to agree upon capital structure
improvement plans with its lead creditor banks in 1998. These plans specified
annual debt to equity ratio targets for each chaebol, identified its core
business area and established divestiture plans for companies outside its core
business areas.
As a result, the average numbers of affiliates of chaebol groups decreased
significantly since 1997 and the debt to equity ratio of listed companies,
excluding financial institutions, improved significantly from 271.4% at
10
the end of 1997 to 128.0% at the end of 2001. In addition, laws and regulations
progressively limiting, and eventually eliminating, the provision of cross
guarantees among chaebol affiliates were implemented.
Financial Condition of Korean Banks and Other Financial Institutions
The capital adequacy and liquidity of most Korean banks and other financial
institutions have been adversely affected by the financial difficulties of
corporate borrowers, high levels of short-term foreign currency borrowings from
foreign financial institutions and the consideration of non-market oriented
factors in making lending decisions.
The Government in late 1997 and 1998 ordered the closing of many of the
worst affected financial institutions. In addition, the Government took control
of two large commercial banks, Seoul Bank and Korea First Bank, by
recapitalizing them. In December 1999, the Government sold a controlling
interest in Korea First Bank to Newbridge Capital, and subsequently, the
Government extended an invitation to domestic and foreign financial
institutions to bid for and acquire Seoul Bank. The Government selected Hana
Bank as the acquirer and the Hana Bank-Seoul Bank merger was consummated in
December 2002. The newly merged entity formed the Republic's third largest
commercial bank in terms of total assets. In January 2003, Shinhan Financial
Group Co., Ltd. was selected by the Public Fund Oversight Committee as the
preferred bidder with respect to the sale of the Chohung Bank shares owned by
the Government.
Further, to enhance the competitiveness of the Republic's financial
institutions, the Government passed a law in October 2000 permitting the
establishment of financial holding companies. Pursuant to such legislation, the
Government formed a financial holding company, of which the Government is
currently the controlling shareholder and whose holdings include Woori Bank and
several other Korean commercial banks. Korean banks have also pursued mergers
and acquisitions. A merger between H&CB and Kookmin Bank was completed in
October 2001, and the merged entity became the largest bank in the Republic in
terms of total assets.
The Government estimates that, as of September 30, 2002, banks and non-bank
financial institutions held non-performing assets (defined to include loans and
other credits on which interest had not been paid for at least three months)
totaling approximately (Won)31.3 trillion, compared to (Won)50.2 trillion as of
December 31, 2001. By December 31, 2002, the Non-Performing Asset Management
Fund managed by KAMCO had purchased approximately (Won)104.7 trillion in
principal amount of non-performing assets from financial institutions for
(Won)39.1 trillion. The fund uses cash and three- to five- year
Government-guaranteed notes to pay for its acquisitions.
Foreign Currency Reserves and External Liabilities
The Republic's foreign currency reserves have fluctuated in recent years.
The Republic's foreign currency reserves fell 73.2% to US$8.9 billion as of
December 31, 1997 from US$33.2 billion as of December 31, 1996, mostly due to
repatriations by foreign investors of their investments in Korea, repayments of
external debt, reduced availability of credit from foreign sources and
intervention in the foreign currency market to stabilize the Won. The usable
portion of the reserves, defined as the total foreign currency reserves less
amounts on deposit with overseas branches of Korean financial institutions and
swap positions between The Bank of Korea and other central banks, totaled only
US$3.9 billion as of December 18, 1997.
Since the end of 1997, however, the Government's usable foreign currency
reserves have continued to increase, reaching US$122.9 billion as of January
31, 2003, primarily due to continued trade surpluses and capital inflows.
The Republic's total external liabilities, using standards set by the IMF,
totaled US$148.7 billion as of December 31, 1998, US$137.1 billion as of
December 31, 1999, US$131.7 billion as of December 31, 2000 and US$118.8
billion as of December 31, 2001. Based on preliminary data, the Republic's
external liabilities totaled US$131.0 billion as of December 31, 2002.
Credit Rating Changes
In October 1997, the Republic's long-term foreign currency rating ceiling on
bond obligations, as announced by Moody's Investors Service, Inc., was A1 and
its long-term foreign currency rating as announced by each of Standard & Poor's
Ratings Services and Fitch International Banking Credit Agency was AA-. Since
that time, the rating agencies have changed the country's ratings
11
significantly. In 2002, Moody's upgraded the Republic's long-term foreign
currency rating to A3, Fitch IBCA to A and Standard & Poor's to A-.
The table below shows the credit ratings downgrades for the Republic from
December 1997 to January 1998.
Rating
---------
Date Rating Agency Instrument From To
- ---- ------------- ---------- ---- ----
December 1997 Moody's Foreign currency rating on bond obligations Baa2 Ba1
Foreign currency rating for long-term bank deposits Ba2 B1
Standard & Poor's Long-term foreign currency rating BBB- B+
Long-term local currency rating A- BBB-
Short-term foreign currency rating A-3 C
Short-term local currency rating A-2 A-3
Fitch IBCA Long-term foreign currency rating BBB- B-
January 1998 Moody's Foreign currency rating for bank deposits B1 Caa1
The table below shows the credit ratings upgrades for the Republic from
February 1998 to July 2002.
Rating
---------
Date Rating Agency Instrument From To
- ---- ------------- ---------- ---- ----
February 1998 Standard & Poor's Long-term foreign currency rating B+ BB+
Long-term local currency rating BBB- BBB+
Short-term foreign currency rating C B
Short-term local currency rating A-3 A-2
Fitch IBCA Long-term foreign currency rating B- BB+
January 1999 Standard & Poor's Long-term foreign currency rating BB+ BBB-
Long-term local currency rating BBB+ A-
Short-term foreign currency rating B A-3
Fitch IBCA Long-term foreign currency rating BB+ BBB-
February 1999 Moody's Foreign currency rating on bond obligations Ba1 Baa3
Foreign currency rating for long-term bank deposits Caa1 Ba2
June 1999 Fitch IBCA Long-term foreign currency rating BBB- BBB
November 1999 Standard & Poor's Long-term foreign currency rating BBB- BBB
Short-term local currency rating A-2 A-1
December 1999 Moody's Foreign currency rating on bond obligations Baa3 Baa2
March 2000 Fitch IBCA Long-term foreign currency rating BBB BBB+
November 2001 Standard & Poor's Long-term foreign currency rating BBB BBB+
March 2002 Moody's Foreign currency rating on bond obligations Baa2 A3
June 2002 Fitch IBCA Long-term foreign currency rating BBB+ A
July 2002 Standard & Poor's Long-term foreign currency rating BBB+ A-
- --------
Interest Rate Fluctuations
Due to adverse economic conditions, the depreciation of the Won and the
Government's reform policy, interest rates payable by Korean borrowers
increased substantially, both domestically and internationally, in late 1997
and 1998. The average annual interest rate on three-year Won-denominated,
non-guaranteed corporate
12
bonds rose from 12.6% as of September 30, 1997 to 29.0% as of December 31,
1997. Since the fourth quarter of 1998, interest rates have fallen
significantly, primarily driven by improved economic conditions. The average
interest rate on three-year Won-denominated, non-guaranteed corporate bonds
fell to 5.3% as of February 3, 2003. Internationally, the spreads over United
States treasury bonds on benchmark dollar-denominated bonds issued by the
Republic and Korean financial institutions and companies have improved since
the second half of 1998. If interest rates were to rise significantly in the
future, the debt service costs of Korean borrowers and the possibility of
defaults on debt repayments may increase.
Exchange Rate Fluctuations
Due to adverse economic conditions and reduced liquidity, the value of the
Won in relation to the U.S. dollar and other major foreign currencies declined
substantially in 1997 but generally rose in 1998. Because of market pressure,
in December 1997, the Government allowed the Won to float freely. The market
average exchange rate as announced by the Korea Financial Telecommunications
and Clearings Institute was (Won)1,415.2 to US$1.00 on December 31, 1997,
compared to (Won)914.8 to US$1.00 on September 30, 1997. The Won's sharp
depreciation resulted from, among other things, significant demand for U.S.
dollars and other major foreign currencies by Korean financial institutions and
companies to repay their foreign currency debts, deteriorating foreign currency
holdings of the Republic's financial institutions, credit rating downgrades
experienced by the Republic and Korean financial institutions and corporations,
as well as other external factors, including currency turmoil in Southeast
Asian countries.
Due to improved economic conditions and continued trade surpluses, the Won
has generally appreciated against the U.S. dollar since the end of 1997, and as
of February 3, 2003, the market average exchange rate was (Won)1,178.7 to
US$1.00.
Won depreciation increases substantially the amount of Won revenue needed by
Korean companies to repay foreign currency-denominated debt, increases the
possibility of defaults and results in higher prices for imports, including key
raw materials such as oil, sugar and flour. On the other hand, Won appreciation
generally has an adverse effect on exports by Korean companies.
Stock Market Volatility
The Korea Composite Stock Price Index declined by over 56% from 647.1 on
September 30, 1997 to 280.0 on June 16, 1998. The index recovered to 937.6 on
April 18, 2002, but fell to 600.4 on February 3, 2003, which still represented
an increase of 114.4% since June 16, 1998.
Significant sales of Korean securities by foreign investors and the
repatriation of the sales proceeds could drive down the value of the Won,
reduce the foreign currency reserves held by financial institutions in the
Republic and hinder the ability of Korean companies to raise capital.
Initial Reform Efforts in 1997
In response to the economic difficulties experienced in 1997, the Government
implemented a range of measures to restore the confidence of financial market
participants in Korea by strengthening the country's economic fundamentals.
13
The Government focused its reform measures on restructuring the country's
financial sector. In April 1997, a presidential committee introduced short-term
reform measures, including:
. allowing commercial banks, securities firms and insurance companies to
compete;
. permitting the issuance of financial debentures by commercial banks and
securities firms;
. increasing the size of deposit insurance funds;
. improving public disclosure systems and accounting standards; and
. eliminating interest rate controls.
In June 1997, the Government announced medium- and long-term measures
relating to the restructuring of The Bank of Korea and financial institution
supervisory systems. The Government accelerated implementation of these
measures in connection with the IMF financial aid package and related reforms.
For a more extensive discussion of these measures, see "The Republic of
Korea--The Economy--Post-IMF Reforms--Financial Sector Restructuring".
To support troubled financial institutions and to stabilize the Republic's
financial markets, in August 1997, the Government announced a financial aid
package, including special loans and other measures, for certain commercial and
merchant banks with large amounts of bad loans. The Government also announced
measures to increase the Republic's foreign currency reserves, including
guaranteeing the overseas foreign currency borrowings of Korean commercial
banks.
In October 1997, the Ministry of Finance and Economy established the
Non-Performing Asset Management Fund to assist certain commercial banks and
other financial institutions. The ministry restructured and expanded KAMCO in
November 1997 and mandated it to manage the Non-Performing Asset Management
Fund and purchase and dispose of non-performing assets of financial
institutions. In December 1998, the Government increased the size of the
Non-Performing Asset Management Fund to approximately (Won)33.6 trillion,
funded by (Won)32.5 trillion in proceeds from the issuance of Government
guaranteed bonds, a (Won)0.5 trillion loan from The Korea Development Bank and
a (Won)0.6 trillion contribution from other financial institutions. In August
1999, (Won)12.0 trillion of the Non-Performing Asset Management Fund was
transferred to the Deposit Insurance Fund. The size of the Non-Performing Asset
Management Fund was approximately (Won)22.0 trillion as of December 31, 2002.
The Non-Performing Asset Management Fund has purchased non-performing assets
from commercial banks and other financial institutions since 1997 as follows:
1997 1998 1999 2000 2001 2002
---- ---- ---- ---- ---- ----
(trillions of won)
Face value of non-performing assets purchased 11 33 18 33 6 4
Amount paid for these non-performing assets.. 7 12 4 13 2 1
The fund uses cash and three- to five-year Government guaranteed notes to
pay for its acquisitions.
As uncertainty about the stability of the Republic's financial markets
persisted, in November 1997, the Government announced additional comprehensive
measures to aid the financial sector, including:
. providing faster settlement of bad loans purchased by KAMCO from
financial institutions;
. offering incentives for financial institutions to merge;
. requiring the merger of certain troubled financial institutions with
other financial institutions;
. monitoring the condition of individual financial institutions;
. insuring all amounts deposited with banks, non-bank financial
institutions, and securities investment companies, and all amounts due
from life insurance companies, until the end of 2000;
14
. increasing the daily exchange rate band within which the Won may float
from 2.25% to 10% (the band was subsequently removed); and
. exploring the expansion of the Republic's foreign currency borrowings
from international capital markets.
IMF Financial Aid Package
To help address the country's liquidity crisis and its generally difficult
economic situation, the Government sought assistance from the IMF in November
1997 and reached agreement with the IMF on an aid package in December 1997. The
aid package called for the Republic to receive loans totaling US$58 billion
from the IMF, the World Bank, the ADB and the governments of certain countries,
subject to compliance with several conditions. The loans helped to increase the
Republic's foreign currency reserves and support the Republic's banking sector.
The aid package consisted of US$21.0 billion over three years from the IMF
in standby credits (approximately US$19.5 billion of which was disbursed),
US$10.0 billion from the World Bank to support specific structural reform
programs (US$7.0 billion of which was disbursed) and US$4.0 billion from the
ADB to support policy and institutional reforms (US$3.7 billion of which was
disbursed). In addition, Japan, the United States, France, Germany, the United
Kingdom, Italy, Australia, Canada, Belgium, The Netherlands, Sweden,
Switzerland and New Zealand pledged supplemental financing totaling
approximately US$23 billion; Korea did not utilize any of the supplemental
financing.
Korea had repaid all of the amounts borrowed from the IMF by August 2001,
approximately three years ahead of schedule. As to the amounts borrowed from
the World Bank and the ADB, US$7.0 billion and US$3.7 billion, respectively,
were still outstanding as of December 31, 2002.
Post-IMF Reforms
Since 1998, the Government has implemented comprehensive programs for
economic reform and recovery aimed at rectifying the causes of the economic and
financial difficulties experienced in 1997 and 1998. The key measures
implemented and the results that have been achieved are discussed below.
Financial Sector Restructuring
General Goals. Beginning in late 1997, the Government undertook a
comprehensive restructuring of its financial sector with the following goals:
. improving supervision of the financial sector and strengthening the legal
and regulatory framework for such supervision;
. conforming accounting standards and disclosure rules to international
"best practices";
. requiring the audit of large financial institutions by internationally
recognized accounting firms following auditing standards reflecting
international "best practices";
. upgrading the standards of prudential supervision applicable to financial
institutions;
. strengthening risk management; and
. introducing a stronger market orientation in the activities of financial
institutions.
15
Financial Support for Financial Institutions. To support troubled financial
institutions, the National Assembly in December 1997 authorized guarantees of
up to US$20 billion of external debt of Korean banks, and in January 1998,
additional guarantees of up to US$7 billion of external debt of Korean
commercial and merchant banks and up to US$8 billion of external debt of The
Bank of Korea. The Government used the guarantees to help Korean financial
institutions with their short-term foreign currency debt. In January 1998, the
Government reached agreement with 13 international creditor banks to extend the
maturity of short-term foreign currency obligations incurred by certain Korean
financial institutions by replacing them with one-, two- and three-year loans
guaranteed by the Government. In March 1998, 134 creditor banks tendered
US$21.8 billion of eligible short-term debt in exchange for the guaranteed
loans. The banks received the following guaranteed loans:
Principal
Term of Loan Amount Interest Rate
- ------------ --------- -------------
One year.... US$3.8 billion 225 basis points above the six-month London Interbank Offered Rate
("LIBOR")
Two years... US$9.8 billion 250 basis points above six-month LIBOR
Three years. US$8.3 billion 275 basis points above six-month LIBOR
The two-year and three-year loans were permitted to be prepaid at the option
of the obligors prior to maturity in whole or in part without premium or
penalty. The Korean financial institution obligors of the new loans paid fees
to the Government in return for the guarantees. All of the loans have since
been repaid.
In December 1997, the Public Money Management Fund, which manages public
funds, including pension funds of civil servants, acquired approximately
(Won)4.4 trillion of subordinated bonds from 27 Korean financial institutions
to supplement their capital base. In addition, The Bank of Korea in December
1997 placed a substantial portion of its official reserves on deposit with
overseas branches of Korean banks.
Legislation. In connection with restructuring the financial sector of the
Republic, the following measures have been adopted through legislation by the
National Assembly:
. amending The Bank of Korea Act to provide for the central bank's
independence, with price stability as its main mandate;
. establishing the Financial Supervisory Commission in April 1998 to
supervise and regulate all financial institutions in Korea and
establishing in January 1999 the Financial Supervisory Service as the
Financial Supervisory Commission's executive arm, thereby consolidating
the functions of a number of previous regulatory bodies;
. introducing measures to deal effectively with unsound financial
institutions, including reducing the capital of financially troubled
institutions and allowing for capital injections by the Government on a
case-by-case basis;
. consolidating various deposit insurance institutions into the Korea
Deposit Insurance Corporation ("KDIC") and expanding the sources of
funding for deposit insurance;
. repealing the Republic's usury law that had previously established a
legal maximum interest rate at a ceiling of 40% per annum;
. allowing foreign financial institutions to merge with and acquire
domestic financial institutions;
. strengthening confidentiality protections for private financial
transactions;
. requiring specialized banks and development institutions to comply with
the same prudential standards as commercial banks and the same external
audit requirements as other financial institutions;
16
. amending the Republic's deposit insurance system, so that all amounts
deposited with Korean banks, financial institutions, securities companies
and insurance companies by July 31, 1998, plus interest, would be insured
until the end of the year 2000. After December 31, 2000, all deposits at
any single financial institution are insured only up to (Won)50 million
regardless of the amount deposited; and
. introducing audit committees, compliance officers and internal compliance
rule systems to various financial institutions.
Restructuring and Recapitalizing the Financial Institutions Sector. Since
December 1997, the Government has been restructuring and recapitalizing
troubled financial institutions, including closing insolvent financial
institutions and those failing to carry out rehabilitation plans within
specified periods.
In particular:
. The Government took control of Korea First Bank, Seoul Bank and Chohung
Bank by recapitalizing them. In December 1999, the Government sold a
controlling interest in Korea First Bank to Newbridge Capital and, in
September 2002, the Government selected Hana Bank as the acquirer of
Seoul Bank. Hana Bank and Seoul Bank merged in December 2002. In January
2003, Shinhan Financial Group was selected by the Public Fund Oversight
Committee as the preferred bidder with respect to the sale of the Chohung
Bank shares owned by the Government;
. In June 1998, the Financial Supervisory Commission, after reviewing the
restructuring plans submitted by 12 commercial banks (not including Seoul
Bank and Korea First Bank) that had failed to meet Bank of International
Settlement capital adequacy standards as of December 31, 1997, ordered
the suspension of operations of five commercial banks and the assignment
of their assets and liabilities to five other commercial banks and KAMCO.
KAMCO granted the five purchasing banks "putback" options if the assets
deteriorated within six months from the purchase. The five banks also
received compensation from KDIC for certain losses arising from the
purchase and assumption of the assets and liabilities. In addition, KDIC
injected capital into the purchasing banks by buying subordinated bonds
or stocks. The Government allowed the seven other commercial banks to
continue operations after they submitted revised restructuring or
rehabilitation plans. The Government has continued to monitor the
implementation of the restructuring plans and rehabilitation measures;
. Through August 2001, 15 insurance companies have gone through
restructuring. Two surety companies merged to form Seoul Guaranty
Insurance Corporation;
. Through December 2001, seven securities companies, a securities
investment trust company, 122 mutual savings and finance companies, seven
securities investment trust management companies and 407 credit unions
have been closed. One securities company dissolved voluntarily.
Additionally, the Government has overseen the demerger of three
securities investment trust companies pursuant to which each such
securities investment trust company was divided into two companies, i.e.,
a securities company and a securities investment management company; and
. The Government required the Republic's merchant banks to achieve a
capital adequacy ratio of 8% and through December 2001 closed 28 merchant
banks which failed to meet such ratio. Six unsound merchant banks were
merged into other financial institutions in line with the Government's
restructuring policy. As of December 31, 2002, the number of the
Republic's merchant banks decreased to three compared with 30 as of
December 31, 1997.
In 1999, (1) Boram Bank merged into Hana Bank, (2) Kangwon Bank, Hyundai
International Merchant Bank and Chungbuk Bank merged into Chohung Bank, (3)
Hanil Bank and the Commercial Bank of Korea merged to form Hanvit Bank and (4)
Korea Long Term Credit Bank merged into Kookmin Bank.
In 1999, 2000 and 2001, the Government injected public funds through KDIC in
the aggregate amount of (Won)3.55 trillion into Korea Life Insurance Co., Ltd.
and in the aggregate amount of (Won)10.25 trillion into Seoul Guaranty
Insurance Corporation for recapitalization. In April 2000, the Government
entered into agreements with
17
each of Korea Life Insurance Co., Ltd. and Seoul Guaranty Insurance Corporation
for the implementation of its management normalization plan. In December 2002,
51% of Korea Life Insurance Co., Ltd. held by KDIC was sold to a consortium of
buyers led by the Hanwha Group for approximately US$686 million.
The Financial Supervisory Commission generally has expected banks to adhere
to a specific timetable to achieve specified performance objectives, including:
. improving their capital ratios to 6% by March 1999 and to 8% by March
2000;
. improving operating performance to enhance risk management and
profitability; and
. continuing to identify and resolve non-performing loans.
The Financial Supervisory Commission also encouraged banks to increase their
capital ratios to 10% by December 2000.
Regional banks that do not engage in international lending and national
banks that do not lend in excess of (Won)5 billion to individual corporate
borrowers and do not engage in international lending were required to improve
their capital ratios to 4% by March 1999, 6% by March 2000 and 8% by December
2000.
In June 2000, in an effort to enhance the international competitiveness of
the Republic's banks, the Government announced a plan to implement the
second-phase restructuring of the Republic's banks under the following
principles:
. The Government would create various systematic frameworks, including one
for financial holding companies;
. Banks which are not the recipients of the public funds may implement
their own restructuring; and
. The Government would take initiatives in the restructuring of the banks
that have received public funds or in which the Government has
controlling stakes.
During 2000, the Government announced further details of the second-phase
restructuring plan for the banks and required seven commercial banks, including
Chohung Bank, Hanvit Bank, Korea Exchange Bank, Peace Bank of Korea, Kwangju
Bank, Cheju Bank and Kyungnam Bank, into which the Government had injected
public funds or which did not satisfy the minimum 8% BIS capital adequacy
ratio, to submit their respective management improvement plans. The Government
thereafter approved the management improvement plans submitted by Chohung Bank
and Korea Exchange Bank. With respect to the management improvement plans
submitted by the remaining five commercial banks, the Government approved them
on the condition that they become a subsidiary of a financial holding company.
Four of these five commercial banks became subsidiaries of a financial holding
company, which was established in March 2001. In May 2002, the remaining
commercial bank, Cheju Bank, became a subsidiary of Shinhan Financial Group
that was established in September 2001. Korean banks have also pursued mergers
and acquisitions. A merger between H&CB and Kookmin Bank was completed in
October 2001 and the merged entity became the largest commercial bank in the
Republic in terms of total assets. Hana Bank and Seoul Bank merged in December
2002 to create the third largest commercial bank in the Republic in terms of
total assets. In January 2003, Shinhan Financial Group was selected by the
Public Fund Oversight Committee as the preferred bidder with respect to the
sale of the Chohung Bank shares owned by the Government.
The Government released a white paper on the creation, operation and
recovery of public funds. According to the white paper and subsequent release,
as of December 31, 2002, the Government had injected public funds in the
aggregate of (Won)104.0 trillion in the form of bonds issued by KAMCO and KDIC
and guaranteed by the Government, and had spent an additional (Won)55.0
trillion for the restructuring of the Republic's financial sector. KAMCO had
spent approximately (Won)39.1 trillion ((Won)20.5 trillion by issuance of bonds
with the Government's guarantee), as of December 31, 2002 to purchase
non-performing assets from financial institutions, and KDIC had spent
approximately (Won)100.9 trillion ((Won)83.5 trillion by issuance of bonds with
government guarantees), as of December 31, 2002 to recapitalize banks and life
insurance companies, compensate certain banks and life
18
insurance companies for their losses incurred in acquiring assets and
liabilities of other banks and life insurance companies and to pay deposits
amounts to depositors of certain failed financial institutions. Through
December 31, 2002, KAMCO had recovered (Won)30.1 trillion from the disposition
of assets purchased with public funds, and KDIC had recovered (Won)17.1
trillion from the disposition of assets purchased with public funds.
In January 2000, the Government announced its intention to restructure
securities investment trust companies, including the recapitalization of Korea
Investment Trust Co., Ltd. and Daehan Investment Trust Co., Ltd., the two
largest securities investment trust companies in Korea. The Government injected
public funds in the amount of (Won)7.9 trillion into Korea Investment Trust and
Daehan Investment Trust from late 1999 to June 2000. These companies had large
exposures to corporate bonds and commercial paper issued by the companies of
the Daewoo Group, and the Government also provided liquidity support in
February 2000 to these companies in connection with the redemption required by
the account holders of certain investment trust products sold by them. Each of
Korea Investment Trust and Daehan Investment Trust was divided into a
securities company and an investment trust management company.
Hyundai Investment Trust Securities Co., Ltd., an affiliate of the Hyundai
Group, also experienced financial difficulties as a result of having a large
exposure to debentures issued by the companies of the Daewoo Group. The Hyundai
Group entered into an agreement with the Financial Supervisory Service for the
normalization of Hyundai Investment Trust Securities in May 2000 and announced
a plan to recapitalize Hyundai Investment Trust Securities in June 2000. The
Government is currently seeking other foreign financial organizations that are
interested in acquiring interests in Hyundai Investment Trust Securities and
its subsidiary investment trust management company.
In September 2001, the Corporate Restructuring Promotion Act became
effective. The Corporate Restructuring Promotion Act allows creditor financial
institutions to freeze and restructure the debt of a financially troubled
company that is unable to repay the borrowings from the financial institutions
without additional credit support, upon a resolution by the financial
institutions representing at least 75% of the entire claims amount. A creditor
financial institution which has not participated in the relevant creditor
committee or is opposed to the resolutions of the creditor committee (in
respect of the commencement of the management of a failing company, the
restructuring of the failing company's debt or the provision of new credits)
may request the creditor committee to purchase its claims against the failing
company, and the creditor financial institutions that have approved the
relevant resolution are required to purchase such claims, or the relevant
creditor committee may request KAMCO, KDIC or other resolution financial
institutions under the Depositor Protection Act or any other institution
designated by the creditor committee to purchase such claims, at a price to be
negotiated with the financial institution making the purchase request. The
Corporate Restructuring Promotion Act is scheduled to expire on December 31,
2005.
Trade Liberalization
The Republic agreed with the WTO to eliminate trade-related subsidies by the
end of 1998 and phase out the import diversification program, which limits
certain imports mainly from Japan, by the end of 1999. The Government abolished
one type of trade-related subsidy in January 1998, and in March 1998 the
National Assembly passed a bill abolishing two additional subsidies and
revising the terms of another subsidy. The Government phased out the import
diversification program in June 1999.
In January 1998, the Government reduced the number of items subject to
adjustment tariffs, and in August 1998, it submitted to the IMF a plan to
streamline and improve the transparency of import certification procedures.
Foreign Investment Liberalization
The Government gradually has removed restrictions on foreign investment and
capital market activities. In December 1997, the Government allowed foreigners,
whether individually or in the aggregate, to acquire
19
beneficial ownership of up to 50% of any class of shares listed on the Korea
Stock Exchange. The Government eliminated, with certain limited exceptions, the
aggregate and individual foreign ownership limits in May 1998. In addition, in
July 1998, the Government eliminated all investment ceilings on the purchase by
foreigners of all types of listed or unlisted bonds and later allowed foreign
investment in the Government and corporate bonds, in money market instruments
issued by corporations, including commercial paper, in certificates of deposit
and in repurchase agreements.
The Government also issued clear guidelines on the investment by foreign
financial institutions in the equity securities of Korean financial
institutions and, in March 1998, allowed foreign banks and brokerage houses to
establish subsidiaries in Korea, subject to guidelines established by the
Ministry of Finance and Economy.
In July 1998, the Government permitted domestic corporations to directly
incur long-term external debt through commercial loans or foreign-currency
denominated bond offerings. This approach deviated from the traditional Korean
policy of channeling international borrowings through domestic financial
institutions for on-lending to the corporate sector.
Corporate Governance and Corporate Structure
In line with the agreement with the IMF, the Government has been stressing
increased transparency in corporate governance, in particular through improved
accounting, disclosure and auditing standards.
In line with the Government's reform policy, in late 1997 and 1998, the
National Assembly passed a broad range of measures restructuring the corporate
and financial sectors, including:
. providing tax benefits, such as tax deferrals or exemptions, for mergers
and acquisitions occurring as part of a corporate restructuring;
. rendering interest expenses on excessive corporate borrowing not
deductible for tax purposes beginning in the year 2000 to discourage
excessive borrowing;
. raising the foreign investor shareholding threshold which requires board
approval from the target company from 10% to one-third of the company's
outstanding shares to facilitate the acquisition of Korean companies by
foreign investors (the board approval requirement was subsequently
abolished, thus opening the possibility of hostile takeovers of local
companies by foreigners);
. repealing the mandatory tender offer rule, which previously had required
any acquirer of 25% or more of shares of a corporation listed on the
Korea Stock Exchange or registered in the KOSDAQ Stock Market, Inc. to
make a tender offer bid for more than 50% of the target company's shares;
. repealing the ceiling on the amount of its own shares that a listed
company may hold;
. strengthening legal protection for minority shareholder interests;
. requiring the preparation of combined financial statements for chaebols,
commencing from fiscal year 1999;
. amending the Republic's insolvency laws, including creating a "management
committee" composed of qualified professionals to assist the district
courts' handling of the management of insolvent companies, limiting the
availability of composition proceedings to large-sized companies by
reinforcing eligibility requirements and expediting the time frames
applicable to corporate reorganization and composition proceedings;
. phasing out by March 2000 outstanding cross-guarantees by one chaebol
member of its affiliates' indebtedness and prohibiting the issuance of
new cross-guarantees;
. requiring filing of quarterly reports by listed companies commencing year
2000;
20
. requiring audit committees at Korean companies;
. adopting a new foreign investment law to facilitate foreign investment by
streamlining the investment procedure;
. adopting a law to facilitate the securitization of assets held by the
Republic's corporations and financial institutions; and
. providing the Financial Supervisory Commission with greater authority to
require the restructuring of the Republic's financial institutions.
Furthermore, in 2000 and 2001, the Korean Securities and Exchange Act were
amended several times in order to enhance transparency in corporate governance.
Under such amendments, companies listed on the Korea Stock Exchange or
registered on the KOSDAQ are required to establish audit committees and appoint
a specified number of independent outside directors. Such amendments also
elaborate the criteria for eligibility for appointment as independent outside
director and the procedures by which such outside directors must be nominated
and elected.
In 1998, the Government arranged for US$3.3 billion of trade financing, with
maturities of up to one year, for small- and medium-sized companies and larger
companies not affiliated with the top five chaebols. In addition, in 1999, the
Government increased the amount of credit guarantees available for small- and
medium-sized companies by (Won)24.0 trillion.
Labor Market Reform
Since January 1998, the Government has revised the unemployment insurance
system by, among other things:
. expanding coverage to workers in all companies (with a few statutory
exceptions) starting October 1998;
. increasing minimum benefits to 50% of average monthly wage (based on the
most recent 12-month period), starting March 1998 and 90% of minimum
hourly wage, starting January 2000;
. from March 1998, extending eligibility for unemployment compensation to
those workers who paid unemployment insurance premiums for only six
months as opposed to 12 months; and
. increasing the minimum benefit period from 60 to 90 days, beginning in
January 2000.
In April 1999, unemployment insurance benefits became available to workers
in companies with fewer than five employees and to part-time and temporary
workers. The Government estimates that approximately 362,000 individuals
received (Won)803.0 billion of unemployment benefits in 2001.
In January 1998, a tripartite committee of representatives of labor unions,
corporations and the Government was established to implement key labor reforms.
In February 1998, the committee reached agreement on over 100 labor issues and
agreed to implement labor reform measures, including:
. amending the labor laws to enable corporations to lay off workers for
business reasons;
. permitting, starting July 1999, the formation of teachers' unions; and
. allocating up to (Won)5 trillion to stabilize the labor market.
The agreement calls for companies to make all reasonable efforts to avoid
layoffs, consult with a representative of the employees 60 days before the
planned layoffs, notify the Ministry of Labor about the planned layoffs, select
workers to be laid off based on a fair and rational standard and make an effort
to rehire the laid-off workers when business conditions improve. The Government
endorsed the agreement, and the National Assembly passed legislation regarding
the labor reform measures in February 1998.
21
Since the agreement was announced, one of the labor unions whose
representative participated in the committee rejected certain terms of the
agreement and called for a nationwide strike. Although the strike was
subsequently canceled, members of the union vowed to resist the labor reform
measures, including the layoff of workers for business reasons. In August 1998,
Hyundai Motor Company, which had announced plans for substantial layoffs of
workers due to deteriorating business conditions, agreed to significantly
reduce the number of workers laid off after its labor union staged a prolonged
strike to protest the plans. In September 1998, the representatives of the
labor unions of nine commercial banks of the Republic agreed on a collective
bargaining agreement which enabled the Korean banks to lay off a maximum of 32%
of the workers in connection with the first-phase restructuring of the banks in
1998. In May 1999, two labor unions and representatives from corporations
announced their intention to withdraw from the committee of labor unions,
corporations and the Government.
In July 2000, the Korean Financial Industry Union, which represents the
employees of 30 financial institutions, urged its members to participate in a
strike to express their opposition to mergers of the banks and the possibility
of further layoffs, when the Government announced its plan to implement the
second-phase restructuring of the Republic's banks, including the promulgation
of a law which allows the formation of financial holding companies. The strike
subsequently was cancelled after the Government and the union leaders reached
an agreement whereby the Government would not require mandatory bank mergers.
In December 2000, members of the Kookmin Bank and H&CB labor union participated
in a strike that lasted seven days, opposing the contemplated merger between
the two banks. Actions such as these by labor unions may hinder the
implementation of the labor reform measures and disrupt the Government's plans
to create a more flexible labor market. Much effort is being expended to
resolve labor disputes in a peaceful manner. However, there can be no assurance
that further labor unrest will not occur in the future. Continued labor unrest
in key industries of the Republic may have an adverse effect on the economy.
The functions and prestige of the current tripartite committee may be
strengthened and transformed into an organization that is able to achieve
public consensus more effectively.
Information Provision and Reform Policy Monitoring
To improve transparency and allow market participants to make a more
informed assessment of economic developments in the Republic, Korea agreed to
improve publication and dissemination of its key economic data. The Government
has published the following data since early 1998:
Data Frequency
---- ---------
Foreign Exchange Reserves
(including composition
and net forward Twice monthly (with a
positions).............. five business day delay)
Financial Institution
Data (including
non-performing loans,
capital adequacy and
ownership and
affiliations)........... Quarterly
Short-term External Debt.. Monthly
The Government plans to improve the timeliness of data on local government
finances.
Gross Domestic Product and Major Financial Indicators
Gross Domestic Product
Gross domestic product, or GDP, measures the market value of all final goods
and services produced within a country for a given period and reveals whether a
country's productive output rises or falls over time. Economists present GDP in
both current and constant market prices. GDP at current market prices values a
country's output using the actual prices of each year; GDP at constant market
prices values output using the prices from a base year, thereby eliminating the
distorting effects of inflation or deflation.
22
The following table sets out the composition of the Republic's GDP at
current and constant 1995 market prices and the annual average increase in the
Republic's GDP.
Gross Domestic Product(1)
As % of
GDP
1997 1998 1999 2000 2001(2) 2001(2)
---------- ---------- ---------- ---------- ---------- -------
(billions of won)
Gross Domestic Product at Current
Market Prices:
Private Consumption................... 254,986.5 242,834.1 271,136.5 299,121.8 324,226.3 59.5
General Government Consumption........ 45,659.7 48,782.1 50,089.4 52,479.7 56,785.2 10.5
Gross Domestic Fixed Capital
Formation........................... 159,110.4 132,307.5 134,151.8 148,202.8 147,497.9 27.1
Change in Inventories................. (3,933.1) (38,252.7) (5,380.6) (1,033.7) (2,042.5) (0.4)
Exports of Goods and Services......... 157,413.3 220,960.8 204,377.6 233,791.7 233,857.1 42.9
Less Imports of Goods and Services.... (162,031.0) (161,143.5) (171,277.7) (217,844.7) (221,051.7) (40.6)
Statistical Discrepancy............... 2,070.7 (1,121.7) (352.8) 7,241.5 5,740.9 1.1
---------- ---------- ---------- ---------- ---------- -----
Expenditures on Gross Domestic
Product............................. 453,276.4 444,366.5 482,744.2 521,959.2 545,013.3 100.0
Net Factor Income from the Rest of the
World............................... (2,423.1) (7,724.7) (6,146.6) (2,731.8) (1,138.7) (0.2)
---------- ---------- ---------- ---------- ---------- -----
Gross National Product(1)............. 450,853.3 436,641.8 476,597.6 519,227.4 543,874.6 99.8
========== ========== ========== ========== ========== =====
Gross Domestic Product at Constant
1995 Market Prices:
Private Consumption................... 228,738.3 201,869.3 224,151.8 241,930.5 252,211.2 51.2
General Government Consumption........ 39,984.2 39,818.7 40,328.5 40,382.7 40,444.1 8.2
Gross Domestic Fixed Capital
Formation........................... 145,294.6 114,563.5 118,772.9 132,337.3 130,148.8 26.4
Change in Inventories................. (4,218.3) (27,626.2) (6,167.7) (7,118.5) (7,331.9) (1.5)
Exports of Goods and Services......... 153,930.9 175,640.5 203,443.5 245,132.6 247,478.7 50.2
Less Imports of Goods and Services.... (140,905.2) (109,798.1) (141,443.0) (169,715.7) (164,885.5) (33.4)
Statistical Discrepancy............... 182.2 242.7 (1,376.7) (4,416.0) (5,039.9) (1.0)
---------- ---------- ---------- ---------- ---------- -----
Expenditures on Gross Domestic
Product............................. 423,006.7 394,710.4 437,709.4 478,532.9 493,025.5 100.0
Net Factor Income from the Rest of the
World............................... (2,174.9) (6,589.7) (5,161.9) (2,248.8) (894.3) (0.2)
Trading Gains and Losses from Changes
in the Terms of Trade............... (18,176.4) (22,094.7) (32,026.3) (61,185.3) (71,589.2) (14.5)
---------- ---------- ---------- ---------- ---------- -----
Gross National Income(3).............. 402,655.4 366,026.0 400,521.2 415,098.8 420,542.0 85.3
========== ========== ========== ========== ========== =====
Percentage Increase (Decrease) of GDP
over Previous Year At Current
Prices.............................. 8.4 (2.0) 8.6 8.1 4.4
At Constant 1995 Market Prices........ 5.0 (6.7) 10.9 9.3 3.0
- --------
(1) GDP plus net factor income from the rest of the world is equal to the
Republic's gross national product.
(2) Preliminary.
(3) GDP plus net factor income from the rest of the world and trading gains and
losses from changes in the terms of trade is equal to the Republic's gross
national income.
Source: Monthly Bulletin, June 2002; The Bank of Korea. Monthly Statistics of
Korea, June 2002; Korea National Statistical Office.
23
The following table sets out the Republic's GDP by economic sector at
current and constant 1995 market prices.
Gross Domestic Product by Economic Sector
(at current market prices)
As % of
GDP
1997 1998 1999 2000 2001(1) 2001(1)
--------- --------- --------- --------- --------- -------
(billions of won)
Industrial Sectors:
Agriculture, Forestry and Fisheries....... 24,257.5 21,977.8 24,481.5 24,517.6 24,126.7 4.4
Mining and Manufacturing
Mining and Quarrying.................... 1,908.9 1,675.1 1,670.0 1,802.2 1,786.0 0.3
Manufacturing........................... 130,968.2 137,152.7 148,402.9 163,283.2 163,334.9 30.0
Construction, Electricity, Gas and Water
Electricity, Gas and Water.............. 9,604.1 10,867.6 13,014.0 14,374.4 15,845.8 2.9
Construction............................ 52,795.5 44,992.6 42,149.3 41,788.0 44,879.3 8.2
Services:
Wholesale and Retail Trade, Restaurants
and Hotels.............................. 51,787.7 45,661.3 54,451.0 63,201.6 68,178.0 12.5
Transportation, Storage and
Communication........................... 29,731.3 31,330.4 32,976.3 34,901.1 35,039.8 6.4
Financing, Insurance, Real Estate and
Business Services....................... 86,689.4 86,466.3 95,276.5 98,977.1 105,967.7 19.4
Community, Social and Personal
Services................................ 22,537.5 22,141.3 24,806.0 27,484.8 32,410.9 5.9
Producers of Government Services........... 34,654.1 35,827.1 36,961.5 39,018.5 43,277.2 7.9
Producers of Private Non-Profit Services to
Households............................... 10,656.6 10,895.9 11,470.6 12,320.7 13,514.3 2.5
Import Duties.............................. 15,326.2 12,966.5 15,606.0 19,446.6 20,372.9 3.7
(Imputed Bank Service Charge).............. (17,640.7) (17,588.1) (18,521.4) (19,156.5) (23,720.0) (4.3)
--------- --------- --------- --------- --------- -----
Gross Domestic Product at Current Prices... 453,276.4 444,366.5 482,744.2 521,959.2 545,013.3 100.0
Net Factor Income from the Rest of the
World.................................... (2,423.1) (7,724.7) (6,146.6) (2,731.8) (1,138.7) (0.2)
--------- --------- --------- --------- --------- -----
Gross National Income at Current Prices.... 450,853.3 436,641.8 476,597.6 519,227.4 543,874.6 99.8
========= ========= ========= ========= ========= =====
- --------
(1) Preliminary.
Source: Monthly Statistics of Korea, June 2002; Korea National Statistical
Office.
24
Gross Domestic Product by Economic Sector
(at constant 1995 market prices)
As % of GDP
1997 1998 1999 2000 2001(1) 2001(1)
--------- --------- --------- --------- --------- -----------
(billions of won)
Industrial Sectors:
Agriculture, Forestry and Fisheries....... 25,234.2 23,569.4 24,833.4 25,318.3 25,664.7 5.2
Mining and Manufacturing
Mining and Quarrying.................... 1,759.0 1,337.6 1,408.9 1,443.9 1,451.6 0.3
Manufacturing........................... 126,117.2 116,734.8 141,295.1 163,733.1 166,506.2 33.8
Construction, Electricity, Gas and Water
Electricity, Gas and Water.............. 9,809.0 9,868.0 10,897.0 12,425.3 13,128.8 2.7
Construction............................ 46,137.4 42,161.3 38,305.8 37,125.3 39,220.1 8.0
Services:
Wholesale and Retail Trade, Restaurants
and Hotels............................... 52,511.6 46,813.2 53,422.4 58,635.0 61,000.7 12.4
Transportation, Storage and
Communication............................ 31,135.1 30,887.9 35,361.8 41,691.4 44,753.8 9.1
Financing, Insurance, Real Estate and
Business Services........................ 77,410.9 75,956.4 80,097.4 84,060.8 87,912.7 17.8
Community, Social and Personal
Services................................. 19,259.0 18,119.0 20,123.7 21,148.8 22,692.6 4.6
Producers of Government Services............ 29,156.5 28,896.0 29,110.5 29,125.6 29,084.8 5.9
Producers of Private Non-Profit Services to
Households................................. 8,837.3 8,856.2 9,086.8 9,190.9 9,569.3 1.9
Import Duties............................... 12,479.3 7,681.9 10,296.8 12,784.2 12,203.5 2.5
(Imputed Bank Service Charge)............... (16,839.9) (16,171.2) (16,530.2) (18,149.6) (20,163.2) (4.1)
--------- --------- --------- --------- --------- -----
Gross Domestic Product at Constant 1995
Market Prices.............................. 423,006.7 394,710.4 437,709.4 478,532.9 493,025.5 100.0
Net Factor Income from the Rest of the
World...................................... (2,174.9) (6,589.7) (5,161.9) (2,248.8) (894.3) (0.2)
Trading Gains and Losses from Changes in the
Terms of Trade............................. (18,176.4) (22,094.7) (32,026.3) (61,185.3) (71,589.2) (14.5)
--------- --------- --------- --------- --------- -----
Gross National Income at Constant 1995
Market Prices.............................. 402,655.4 366,026.0 400,521.2 415,098.8 420,542.0 85.3
========= ========= ========= ========= ========= =====
- --------
(1) Preliminary.
Source: Monthly Bulletin, June 2002; The Bank of Korea.
In 1997, GDP growth declined to 5.0% from 6.8% in 1996 at constant market
prices. The aggregate of private and general government consumption
expenditures grew only 3.2% in 1997. Gross domestic fixed capital formation
decreased by 2.2% in 1997, due to the continued sharp decline in facility
investments, which decreased by 8.7% in 1997.
GDP contracted 6.7% in 1998 at constant market prices. The aggregate of
private and general government consumption expenditures declined by 10.1% and
gross domestic fixed capital formation declined by 21.2%, as facility
investments declined sharply by 38.8% compared with 1997.
In 1999, GDP growth increased to 10.9% at constant market prices. The
aggregate of private and general government consumption expenditures increased
by 9.4% and gross domestic fixed capital formation increased by 3.7%.
In 2000, GDP growth was 9.3% at constant market prices. The aggregate
private and general government consumption expenditures increased by 6.7% and
gross domestic fixed capital formation increased by 11.4%.
25
Based on preliminary data, GDP growth slowed in 2001 to 3.0% at constant
market prices, as aggregate private and general government consumption
expenditures increased by 3.7%, and gross domestic fixed capital formation
decreased by 1.7%.
Based on preliminary data, GDP growth in the first half of 2002 was 6.1% at
constant market prices, as aggregate private and general government consumption
expenditures increased by 7.7%, and gross domestic fixed capital formation
increased by 6.0%.
Principal Sectors of the Economy
Industrial Sectors
The following table sets out production indices for the principal industrial
products of the Republic and their relative contribution to total industrial
production.
Industrial Production
2000
Index
Weight(1) 1998 1999 2000 2001 2002
--------- ----- ----- ----- ----- -----
Mining............................................... 36.2 93.9 101.4 100.0 99.1 103.2
Coal.............................................. 4.7 106.8 98.8 100.0 94.0 83.4
Metal Ores........................................ 0.8 144.6 122.0 100.0 58.1 96.7
Others............................................ 30.7 91.4 101.2 100.0 100.9 106.4
Manufacturing........................................ 9,362.9 68.3 85.4 100.0 100.9 108.3
Food Products and Beverages....................... 658.8 88.8 97.2 100.0 105.6 108.5
Tobacco Products.................................. 53.4 102.8 97.7 100.0 99.6 99.9
Textiles.......................................... 472.7 94.2 100.1 100.0 90.0 84.6
Apparel and Fur Articles.......................... 210.3 79.0 87.1 100.0 92.7 99.7
Tanning and Dressing of Leather................... 97.6 107.7 108.4 100.0 94.8 87.4
Wood and Wood and Cork Products................... 62.2 76.6 96.7 100.0 105.9 110.7
Pulp, Paper and Paper Products.................... 193.2 86.6 96.3 100.0 98.9 105.0
Publishing, Printing and Reproduction of Record
Media........................................... 226.8 100.4 98.2 100.0 103.8 110.2
Coke, Refined Petroleum Products and Nuclear Fuel. 309.9 90.3 98.4 100.0 96.3 88.1
Chemicals and Chemical Products................... 856.9 85.5 94.3 100.0 102.8 109.3
Rubber and Plastic Products....................... 429.9 79.7 93.7 100.0 102.6 110.2
Non-Metallic Mineral Products..................... 331.5 87.3 93.8 100.0 102.1 107.7
Basic Metals...................................... 566.2 80.7 92.2 100.0 101.4 106.1
Fabricated Metal Products......................... 414.8 90.8 95.4 100.0 95.3 99.0
Machinery and Equipment........................... 812.5 66.2 81.5 100.0 97.0 104.7
Office, Accounting and Computing Machinery........ 330.8 30.7 62.2 100.0 100.3 110.9
Electrical Machinery and Apparatus and Others..... 379.8 64.4 82.7 100.0 95.9 103.6
Radio, Television and Communication Equipment..... 1,481.0 50.4 74.0 100.0 105.3 128.1
Medical Precision and Optical Instrument, Watches. 105.0 83.1 92.5 100.0 101.4 100.9
Motor Vehicles and Trailers....................... 916.1 57.3 87.8 100.0 98.7 106.7
Other Transport Equipment......................... 274.6 100.3 108.8 100.0 125.3 124.4
Furniture and Other Manufactured Goods............ 178.9 88.7 105.2 100.0 95.0 95.6
Electricity and Gas.................................. 600.9 79.4 89.4 100.0 106.9 114.9
All Items............................................ 10,000.0 68.9 85.6 100.0 101.3 108.7
Percentage Increase (Decrease) of All Items
Over Previous Year.............................. (6.5) 24.2 16.8 1.3 7.3
- --------
(1) Index weights were established on the basis of an industrial census in 2000
and reflect the average annual value added by production in each of the
classifications shown, expressed as a percentage of total value added in
the mining, manufacturing and electricity and gas industries in that year.
Source: National Statistical Office.
26
Industrial production declined by 6.5% in 1998 because of the economic
slowdown which depressed domestic demand. Industrial production increased 24.2%
in 1999 because of the Republic's recovery of domestic consumption and the
general stabilization in the economy. Industrial production increased by 16.8%
in 2000 primarily due to increased exports and high domestic consumption.
Industrial production growth slowed to 1.3% in 2001 because exports decreased
while domestic consumption growth slowed. The Government estimates that
industrial production increased by 7.3% in 2002 primarily due to strong
domestic consumption and increased exports.
Manufacturing
In 1998, the manufacturing sector contracted by 6.6% compared with 1997. In
1999 and 2000, the manufacturing sector grew by 25.0% and 17.1%, respectively,
due to general recovery from the economic downturn in 1998. In 2001, the
manufacturing sector increased production by 0.9%, and in 2002, the
manufacturing sector increased production by 7.3%. Light industries did not
fare as well as the heavy and chemical industries segment as the economic boom
of the early- and mid-1990s favored the large companies involved in the heavy
and chemical industries. Light industry recorded a 15.5% decline in 1998. In
1999, light industry recorded an increase of production of 9.6%. In 2000, light
industry recorded an increase of production of 2.8% due to increased production
of clothing, rubber and plastic products. In 2001, light industry recorded a
0.7% decline due to the decreased production of textile, apparel and leather
products.
Automobiles. In 1998, domestic auto sales decreased by 48.5% compared to
1997 due to a decrease in real income and rises in unemployment and interest
rates caused by the country's economic restructuring. Exports recorded only
modest growth of 3.4% due to a reduction in demand from developing countries.
Labor unrest at Hyundai Motors, the largest auto maker in Korea, also
contributed to the decrease in automobile production. Overall automobile
production of the Republic in 1998 decreased by 34.0% compared to 1997. In
1999, automobile production increased by 45.5%, domestic sales recorded an
increase of 63.2% and exports recorded an increase of 10.9%, each compared with
1998. In 2000, automobile production increased by 9.6%, domestic sales recorded
an increase of 12.3% and exports recorded an increase of 11.0%, each compared
with 1999. In 2001, automobile production decreased by 5.4% compared to 2000.
In 2001, domestic sales recorded an increase of 1.5% and exports recorded a
decrease of 10.5%, each compared with 2000.
Electronics. In 1998, electronics production decreased by 20.1% and exports
decreased by 7.2% compared to 1997 primarily because of continued oversupply of
semiconductor memory chips in the world market. In 1999, electronics production
increased by 43.5% compared to 1998, and exports increased by 34.2%. The growth
in global electronics demand, particularly for "information technology
products", such as semiconductor products, liquid crystal display devices,
mobile phones and personal computers, led this growth. In 1999, export sales of
semiconductor memory chips constituted approximately 37% of the Republic's
total exports. In 2000, electronics production increased by 17.7% and exports
increased by 31.0% compared to 1999 primarily because of the growth in global
information technology products demand. In 2000, export sales of semiconductor
memory chips constituted approximately 15% of the Republic's total exports. In
2001, electronics production increased by 11.8% and exports increased by 20.6%
compared to 2000 primarily due to the continued growth in global information
technology products demand. In 2001, export sales of semiconductor memory chips
constituted approximately 9.5% of the Republic's total exports.
Iron and Steel. Crude steel production in 1998 totaled 39.9 million tons, a
decrease of 6.2% from 1997, to rank sixth in the world. Domestic sales
decreased by 36.1% while exports increased 56.6%, largely due to enhanced price
competitiveness because of the devalued won. Overall steel production in 1998
decreased by 12.9% compared to 1997. In 1999, crude steel production increased
by 2.9% compared with 1998. In 2000, crude steel production totaled 43.1
million tons, an increase of 5.0% from 1999. Domestic sales increased by 13.7%
due to the general stabilization in the economy while exports decreased
slightly due to the oversupply of steel products in the world market. In 2001,
crude steel production totaled 43.8 million tons, an increase of 1.7% from
2000. Domestic sales and exports slightly decreased due to the oversupply of
steel products in the domestic and world markets.
27
Shipbuilding. Shipbuilding orders in 1998 equaled 8.8 million gross tons, a
decrease of 35.8% compared to 1997. Despite the decrease, Korea recorded the
world's second largest share of shipbuilding orders in 1998. In 1999, the
Republic's shipbuilding orders amounted to 11.8 million tons, which represented
the world's largest share in such year. In 2000, the Republic's shipbuilding
orders amounted to 20.8 million gross tons, an increase of 75.6% compared to
1999. Korea recorded the world's largest share of shipbuilding orders in 2000.
In 2001, the Republic's shipbuilding orders amounted to 11.8 million gross
tons, a decrease of 43.1% compared to 2000 due to decreased exports.
Agriculture, Forestry and Fisheries
The Government's agricultural policy has traditionally focused on:
. grain production;
. development of irrigation systems;
. land consolidation and reclamation;
. seed improvement;
. mechanization measures to combat drought and flood damage; and
. increasing agricultural incomes.
Recently, however, the Government has increased emphasis on cultivating
profitable crops and strengthening international competitiveness in
anticipation of opening the domestic agricultural market.
The production of rice, the largest agricultural product in Korea, totaled
5.1 million tons in 1998, representing a 0.7% decrease compared to 1997. In
1999, rice production increased to 5.3 million tons, a 3.2% increase compared
with 1998. Due to limited crop yields resulting from geographical and physical
constraints, the Republic depends on imports for certain basic foodstuffs. The
Republic's self-sufficiency ratio further decreased from 57.9% in 1997 to 57.6%
in 1998 and 54.2% in 1999. In 2000, the Republic's self sufficiency ratio
slightly increased to 56.6%. In 2001, the Republic's self sufficiency ratio was
55.2%.
The Government is seeking to develop the fishing industry by encouraging the
building of large fishing vessels and modernizing fishing equipment, marketing
techniques and distribution outlets.
The contribution of the agriculture, forestry and fisheries subsector to GDP
declined, at constant 1995 market prices, from 6.3% in 1994 to 5.2% in 2000 as
a result of industrialization. In 2000, the agriculture, forestry and fisheries
subsector posted no significant change from 1999. In 2001, agriculture,
forestry and fisheries industry increased by 1.4% compared to 2000 due to the
increased productions of rice, fruits and corns as well as the increase of
fishing catches.
Construction
The construction industry constituted 8.0% of the Republic's GDP in 2001. In
1998, the construction industry contracted by 8.6% compared with 1997 because
of the economic downturn. In 1999, the construction industry contracted by
10.1% compared with 1998. In 2000, the construction industry contracted by 3.7%
compared with 1999 due to decreased orders for the construction of homes and
investments in infrastructure. In 2001, the construction industry increased by
5.7% compared with 2000 due to the expansion of residential, commercial and
educational construction and the steady increase of government investments in
infrastructure.
28
Electricity and Gas
The following table sets out the Republic's dependence on imports for energy
consumption.
Dependence on Imports for Energy Consumption
Total Energy Consumption Imports Imports Dependence Ratio
------------------------ ------- ------------------------
(millions of tons of oil equivalents, except ratios)
1997 180.6 199.0 110.2
1998 165.9 189.7 114.3
1999 181.4 201.0 110.8
2000 192.9 213.8 110.8
2001 198.3 215.4 108.6
- --------
Source: Monthly Energy Statistics, June 2002; Korea Energy Economics Institute.
Korea has no domestic oil or gas production and depends on imported oil and
gas to meet its energy requirements. Accordingly, the international prices of
oil and gas significantly affects the Korean economy. Any significant long-term
increase in the prices of oil and gas will increase inflationary pressures in
Korea and adversely affect the Republic's balance of trade.
To reduce its dependence on oil and gas imports, the Government has
encouraged an energy source diversification program emphasizing nuclear energy.
The following table sets out the principal primary sources of energy consumed
in the Republic, expressed in oil equivalents and as a percentage of total
energy consumption.
Consumption of Energy by Source
Coal Petroleum Nuclear Others Total
------------- ------------- ------------- ------------- --------------
Quantity % Quantity % Quantity % Quantity % Quantity %
-------- ---- -------- ---- -------- ---- -------- ---- -------- -----
(millions of tons of oil equivalents, except percentages)
1997 34.8 19.3 109.1 60.4 19.3 10.7 17.5 9.6 180.6 100.0
1998 36.0 21.7 90.6 54.6 22.4 13.5 16.9 10.2 165.9 100.0
1999 38.2 21.0 97.3 53.6 25.8 14.2 20.1 11.1 181.4 100.0
2000 42.9 22.2 100.3 52.0 27.2 14.1 22.5 11.7 192.9 100.0
2001 45.7 23.0 100.4 50.6 28.0 14.1 24.2 12.2 198.3 100.0
- --------
Source: Monthly Energy Statistics, June 2002; Korea Energy Economics Institute.
The Republic's first nuclear power plant went into full operation in 1978
with a rated generating capacity of 587 megawatts. Eight more nuclear power
plants were completed between 1982 and 1997, adding 9,733 megawatts of
generating capacity. In 2001, total nuclear power generating capacity was
approximately 13,720 megawatts.
Services Sector
In 1998, the services sector was adversely affected by the Republic's
economic downturn. In 1998, the transportation, storage and communications
subsector contracted by 0.8% compared with 1997. In 1999, the transportation,
storage and communications subsector increased by 14.5% compared with 1998. The
transportation, storage and communications sector further increased by 17.9% in
2000 compared with 1999. In 2001, the transportation, storage and
communications sector increased by 7.3% compared with 2000. The financing,
insurance, real estate and business services subsector contracted by 1.9% in
1998 because of the economic downturn. With large increases in securities
trading in 1999, the financing, insurance, real estate and
29
business services subsector increased by 5.5% compared with 1998. In 2000, the
financing, insurance, real estate and business service subsector increased by
4.9% compared with 1999. In 2001, the financing, insurance, real estate and
business service subsector increased by 4.6% compared with 2000.
Prices, Wages and Employment
The following table shows selected price and wage indices and unemployment
rates:
Increase Increase Increase
Producer Over Consumer Over Over
Price Previous Price Previous Wage Previous Unemployment
Index(1) Year Index(1) Year Index(1)(2) Year Rate(1)(3)
---------- -------- ---------- -------- ----------- -------- ------------
(1995=100) (%) (2000=100) (%) (1990=100) (%) (%)
1997 107.2 3.9 90.2 4.4 227.8 7.0 2.6
1998 120.3 12.2 97.0 7.5 222.3 (2.5) 6.8
1999 117.8 (2.1) 97.8 0.8 249.1 12.1 6.3
2000 120.2 2.0 100.0 2.2 141.3 8.0 4.1
2001 122.5 1.9 104.1 4.1 149.3 5.6 3.7
2002 124.4 1.6 106.9 2.7 N.A. N.A. 3.0
- --------
(1) Average for year.
(2) Nominal wage index of earnings in all industries.
(3) Expressed as a percentage of the economically active population.
Source: The Bank of Korea; The National Statistical Office.
The Government's economic policy has helped keep inflation low. The
inflation rate stood at 4.4% in 1997, 7.5% in 1998, 0.8% in 1999, 2.2% in 2000,
4.1% in 2001 and 2.7% in 2002.
The economic events in 1997 and 1998 described above led to an increase in
unemployment from 2.6% in 1997 to 6.3% in 1999, but unemployment has since
decreased to 4.1% in 2000, 3.7% in 2001 and 3.0% in 2002.
Korea regards its well-educated labor force as one of its principal assets.
From 1992 to 2001, the economically active population of the Republic increased
by 13.8% to 22.2 million, while the number of employees increased 12.2% to 21.4
million. The economically active population over 15 years old as a percentage
of the total over-15 population has remained between 58% and 63% over the past
decade. Literacy among workers under 50 is almost universal.
For a description of the Republic's unemployment insurance system, see "The
Republic of Korea--The Economy--Post-IMF Reforms--Labor Market Reform".
Balance of Payments and Foreign Trade
Balance of Payments
Balance of payments figures measure the relative flow of goods, services and
capital into and out of the country as represented in the current balance and
the capital balance. The current balance tracks a country's trade in goods and
services and transfer payments and measures whether a country is living within
its income from trading and investments. The capital balance covers all
transactions involving the transfer of capital into and out of the country,
including loans and investments. The overall balance represents the sum of the
current and capital balances. An overall balance surplus indicates a net inflow
of foreign currencies, thereby increasing demand for and strengthening the
local currency. An overall balance deficit indicates a net outflow of foreign
currencies, thereby decreasing demand for and weakening the local currency. The
financial account mirrors the overall balance. If the overall balance is
positive, the surplus, which represents the nation's savings, finances the
overall deficit of the country's trading partners. Accordingly, the financial
account will indicate cash outflows equal to
30
the overall surplus. If, however, the overall balance is negative, the nation
has an international deficit which must be financed. Accordingly, the financial
account will indicate cash inflows equal to the overall deficit.
The following table sets out certain information with respect to the
Republic's balance of payments.
Balance of Payments
Classification December 31,
- -------------- -----------------------------------------------------
1997 1998 1999 2000 2001
--------- --------- --------- --------- ---------
(millions of dollars)
Current Account................. (8,166.7) 40,364.9 24,476.7 12,241.2 8,238.9
Goods........................ (3,179.1) 41,626.8 28,370.9 16,871.6 13,491.9
Exports(1)............... 138,619.1 132,121.6 145,163.6 175,947.7 151,261.6
Imports(1)............... 141,798.2 90,494.8 116,792.7 159,076.1 137,769.7
Services..................... (3,200.3) 1,024.1 (651.0) (2,889.2) (3,827.6)
Income....................... (2,454.3) (5,638.3) (5,159.0) (2,421.3) (1,198.1)
Current Transfers............ 667.0 3,352.3 1,915.8 680.1 (227.3)
Capital and Financial Account... 1,314.4 (3,196.7) 2,040.3 12,110.0 (3,274.9)
Financial Account(2)..... 1,922.0 (3,367.8) 2,429.6 12,725.2 (2,543.9)
Capital Account.......... (607.6) 171.1 (389.3) (615.2) (731.0)
Changes in Reserve Assets....... 11,921.7 (30,975.0) (22,982.9) (23,771.2) (7,575.8)
Net Errors and Omissions........ (5,069.4) (6,193.2) (3,534.1) (580.0) 2,611.8
- --------
(1) These entries are derived from trade statistics and are valued on a free on
board basis, meaning that the insurance and freight costs are not included.
(2) Includes borrowings from the IMF, syndicated bank loans and short-term
borrowings.
Source: Monthly Bulletin, March 2002; The Bank of Korea.
The figures for 2001 indicate a current account surplus of approximately
US$8.2 billion. The current account surplus in 2001 decreased in comparison
with the current account surplus in 2000, primarily due to a 12.7% decrease in
exports, which more than offset a 12.1% decrease in imports. Based on
preliminary data, the estimated current account surplus for the first six
months of 2002 was US$3.6 billion.
Trade Balance
Trade balance figures measure the difference between a country's exports and
imports. If exports exceed imports the country has a trade balance surplus
while if imports exceed exports the country has a deficit. A deficit,
indicating that a country's receipts from abroad fall short of its payments to
foreigners, must be financed, rendering the country a debtor nation. A surplus,
indicating that a country's receipts exceed its payments to foreigners, allows
the country to finance its trading partners' net deficit to the extent of the
surplus, rendering the country a creditor nation.
31
The following table summarizes the Republic's trade balance for the periods
indicated:
Trade Balance
Exports
Balance as % of
Exports(1) Imports(2) of Trade Imports
---------- ---------- -------- -------
(millions of dollars, except percentages)
1997 136,164.2 144,616.4 (8,452.2) 94.2
1998 132,313.1 93,281.8 39,031.4 141.8
1999 143,685.5 119,752.3 23,933.2 120.0
2000 172,267.5 160,481.0 11,786.5 107.3
2001 150,439.1 141,097.8 9,341.3 106.6
2002 162,821.5 152,019.8 10,801.8 107.1
- --------
(1) These entries are derived from trade statistics and are valued on a free on
board basis.
(2) These entries are derived from customs clearance statistics on a C.I.F.
basis, meaning that the price of goods include insurance and freight cost.
Source: Monthly Bulletin, January 2003; The Bank of Korea.
The Republic, due to its lack of natural resources, relies on extensive
trading activity for growth. The country meets virtually all domestic
requirements for petroleum, wood and rubber with imports, as well as much of
its coal and iron needs. Exports consistently represent a high percentage of
GDP; accordingly, the international economic environment is of crucial
importance to the Republic's economy.
The following tables give information regarding the Republic's exports and
imports by major commodity groups:
Exports by Major Commodity Groups (F.O.B.)(1)
As % As % As % As % As %
of of of of of
1997 Total 1998 Total 1999 Total 2000 Total 2001 Total
--------- ----- --------- ----- --------- ----- --------- ----- --------- -----
(millions of dollars, except percentages)
Foods & Consumer Goods....... 3,012.8 2.2 2,744.7 2.1 2,951.0 2.1 2,791.9 1.6 2,646.2 1.8
Raw Materials and Fuels...... 7,712.8 5.7 7,385.4 5.6 7,846.7 5.5 11,572.3 6.7 9,999.5 6.6
Light Industrial Products.... 33,750.2 24.8 32,486.0 24.6 29,708.6 20.7 30,286.2 17.6 26,316.2 17.5
Fibres................... 1,735.4 1.3 1,505.6 1.1 1,390.3 1.0 1,529.8 0.9 1,260.5 0.8
Cloths................... 9,580.1 7.0 7,850.4 5.9 7,998.2 5.6 8,523.0 4.9 7,011.5 4.7
Clothing................. 4,194.4 3.1 4,653.3 3.5 4,869.0 3.4 5,024.1 2.9 4,300.1 2.9
Tires and Tubes.......... 1,437.3 1.1 1,543.0 1.2 1,485.8 1.0 1,421.4 0.8 1,425.7 0.9
Heavy & Chemical Industrial
Products.................... 91,688.5 67.3 89,697.0 67.8 103,179.2 71.8 127,617.1 74.1 111,477.2 74.1
Chemical Manufacturing
Products................ 9,333.2 6.9 9,016.8 6.8 9,408.8 6.5 12,144.7 7.0 10,826.7 7.2
Metal Goods.............. 9,942.5 7.3 11,118.7 8.4 10,308.4 7.2 11,362.5 6.6 10,031.4 6.7
Machinery................ 10,189.0 7.5 10,064.0 7.6 11,593.7 8.1 11,997.0 7.0 11,640.4 7.7
Electronics.............. 36,744.9 27.0 34,284.4 25.9 45,806.7 31.9 62,043.0 36.0 47,359.7 31.5
Passenger Cars........... 8,634.6 6.3 8,167.1 6.2 9,416.7 6.6 11,101.6 6.4 11,450.8 7.6
Ship..................... 6,519.7 4.8 8,014.1 6.1 7,490.3 5.2 8,229.4 4.8 9,699.2 6.4
--------- ----- --------- ----- --------- ----- --------- ----- --------- -----
Total................. 136,164.2 100.0 132,313.1 100.0 143,685.5 100.0 172,267.5 100.0 150,439.1 100.0
========= ===== ========= ===== ========= ===== ========= ===== ========= =====
- --------
(1) These entries are derived from customs clearance statistics. F.O.B. stands
for free on board, meaning that insurance and freight costs are not
included.
Source: Monthly Bulletin, June 2002; The Bank of Korea.
32
Imports by Major Commodity Groups (C.I.F.)(1)
As % As % As % As % As %
of of of of of
1997 Total 1998 Total 1999 Total 2000 Total 2001 Total
--------- ----- -------- ----- --------- ----- --------- ----- --------- -----
(millions of dollars, except percentages)
Foods & Consumer Goods........ 20,930.6 14.5 12,655.4 13.6 14,011.6 11.7 16,073.7 10.0 16,630.7 11.8
Grain..................... 3,101.1 2.1 2,519.9 2.7 2,319.6 1.9 2,438.3 1.5 2,528.8 1.8
Direct Consumption
Goods.................... 4,154.6 2.9 2,372.5 2.5 3,655.9 3.1 4,646.8 2.9 4,786.5 3.4
Durable Goods............. 10,900.2 7.5 6,644.4 7.1 6,396.9 5.3 6,424.0 4.0 6,216.8 4.4
Nondurable Goods.......... 2,744.6 1.9 1,090.8 1.2 1,623.4 1.4 2,549.3 1.6 3,091.2 2.2
Industrial Materials and Fuels 69,361.1 48.0 45,593.5 48.9 57,252.9 47.8 78,974.8 49.2 71,929.3 51.0
Crude Oil................. 17,771.8 12.3 11,240.6 12.1 14,782.7 12.3 25,215.6 15.7 21,367.8 15.1
Raw Material for Light
Industry................. 5,699.0 3.9 3,731.8 4.0 4,184.7 3.5 4,844.7 3.0 4,408.8 3.1
Chemical Products......... 11,438.4 7.9 7,973.7 8.5 9,796.3 8.2 11,837.6 7.4 11,274.5 8.0
Steel Products............ 6,255.5 4.3 3,319.2 3.6 4,750.3 4.0 6,007.0 3.7 5,029.7 3.6
Capital Goods................. 54,324.7 37.6 35,032.9 37.6 48,487.8 40.5 65,432.5 40.8 52,537.8 37.2
Machinery................. 20,448.0 14.1 10,491.5 11.2 13,514.2 11.3 18,425.9 11.5 15,264.2 10.8
Electronic Products....... 28,592.3 19.8 21,583.4 23.1 31,673.1 26.4 43,292.9 27.0 33,839.2 30.0
Transport Equipment....... 3,963.5 2.7 2,137.7 2.3 2,392.5 2.0 2,815.5 1.8 2,648.4 1.9
--------- ----- -------- ----- --------- ----- --------- ----- --------- -----
Total.................. 144,616.4 100.0 93,281.8 100.0 119,752.3 100.0 160,481.0 100.0 141,097.8 100.0
========= ===== ======== ===== ========= ===== ========= ===== ========= =====
- --------
(1) These entries are derived from customs clearance statistics. C.I.F. means
that the price of goods include insurance and freight costs.
Source: Monthly Bulletin, June 2002; The Bank of Korea.
In 1998, the Republic recorded a trade surplus of US$39.0 billion due to a
35.5% decrease in imports. The Republic's economic difficulties drove down
imports of all categories of goods. Exports decreased by 2.8% due to decreases
in the country's major export categories.
In 1999, the Republic recorded a trade surplus of US$23.9 billion. Exports
grew by 8.6% and imports grew by 28.4%.
In 2000, the Republic recorded a trade surplus of US$11.8 billion. The
Republic's economic recovery led to a 34.0% increase in imports and a 19.9%
increase in exports, due to an increase in major import and export categories.
In 2001, the Republic recorded a trade surplus of US$9.3 billion. Exports
decreased by 12.7% primarily due to weaker sales of computer products and
imports decreased by 12.1% primarily due to decreased demand for raw materials
and capital goods.
Based on preliminary data, the Republic recorded a trade surplus of US$10.8
billion in 2002. Exports increased by 8.2% primarily due to an increase in
sales of semiconductors, automobiles and wireless telecommunication devices and
an increase in trade volume with China and imports increased by 7.7% primarily
due to an increase in purchases of raw materials and machinery.
33
The Republic's largest trading partners, the United States, Japan and China
accounted for the following percentages of the country's imports and exports:
1997 1998 1999 2000 2001(1)
--------------- --------------- --------------- --------------- ---------------
Exports Imports Exports Imports Exports Imports Exports Imports Exports Imports
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
(%)
United States 15.9 20.8 17.2 21.9 20.5 20.8 21.8 18.2 20.8 15.8
Japan........ 10.8 19.3 9.2 18.1 11.0 20.2 11.9 19.8 11.0 18.9
China(2)..... 18.6 7.6 16.0 7.5 15.8 8.1 16.9 8.8 18.4 10.3
- --------
(1) Preliminary.
(2) Including Hong Kong.
Source: Ministry of Commerce, Industry and Energy.
Non-Commodities Trade Balance
In 1998, the Republic recorded a non-commodities trade deficit in its
current account of approximately US$4.6 billion. In 1999, the non-commodities
trade deficit increased to US$5.8 billion. In 2000, the non-commodities trade
deficit decreased to US$5.3 billion. In 2001, the non-commodities trade deficit
decreased to US$4.4 billion.
Foreign Currency Reserves
The following table shows the Republic's total official foreign currency
reserves:
Total Official Reserves
December 31,
-----------------------------------------
1999 2000 2001 2002
--------- --------- ---------- ----------
(millions of dollars)
Gold(1)............................ $ 67.1 $ 67.6 $ 68.3 $ 69.2
Foreign Exchange................... 73,700.2 95,855.2 102,487.5 120,811.5
--------- --------- ---------- ----------
Total Gold and Foreign Exchange. 73,767.3 95,922.8 102,555.8 120,880.7
Reserve Position at IMF............ 286.5 271.8 262.2 520.2
Special Drawing Rights............. 0.7 3.5 3.3 11.8
--------- --------- ---------- ----------
Total Official Reserves......... $74,054.5 $96,198.1 $102,821.4 $121,412.7
========= ========= ========== ==========
- --------
(1) For this purpose, domestically-owned gold is valued at US$42.22 per troy
ounce (31.1035 grams) and gold deposited overseas is calculated at cost of
purchase.
Source: The Bank of Korea.
The Government's foreign currency reserves increased to US$122.9 billion as
of January 31, 2003 from US$8.9 billion as of December 31, 1997, primarily due
to continued balance of trade surpluses and capital inflows.
The Financial System
Structure of the Financial Sector
The Republic's financial sector includes the following categories of
financial institutions:
. The Bank of Korea;
. banking institutions;
. non-bank financial institutions; and
34
. other financial entities, including:
--securities institutions;
--credit guarantee institutions;
--venture capital companies; and
--miscellaneous others.
To increase transparency in financial transactions and enhance the integrity
and efficiency of the financial markets, Korean law requires that financial
institutions confirm that their clients use their real names when transacting
business. To ease the liquidity crisis, the Government altered the real-name
financial transactions system during 1998, to allow the sale or deposit of
foreign currencies through domestic financial institutions and the purchase of
certain bonds, including Government bonds, without identification. The
Government also strengthened confidentiality protection for private financial
transactions.
Banking Industry
The banking industry comprises commercial banks and specialized banks.
Commercial banks serve the general public and corporate sectors. They include
nationwide banks, regional banks and branches of foreign banks. Regional banks
provide services similar to nationwide banks, but operate in a geographically
restricted region. Branches of foreign banks have operated in Korea since 1967
but provide a relatively small proportion of the country's banking services. As
of December 31, 2002, commercial banks consisted of eight nationwide banks, all
of which have branch networks throughout Korea, six regional banks and 62
branches of foreign banks operated in the country. Nationwide and regional
banks had in the aggregate 4,857 domestic branches and offices, 56 overseas
branches, two overseas representative offices and 21 overseas subsidiaries as
of September 30, 2002.
Specialized banks meet the needs of specific sectors of the economy in
accordance with Government policy; they are organized under, or chartered by,
special laws. Specialized banks include:
. The Korea Development Bank;
. The Export-Import Bank of Korea;
. The Industrial Bank of Korea;
. National Agricultural Cooperatives Federation (which merged with the
National Livestock Cooperatives Federation in July 2000); and
. National Federation of Fisheries Cooperatives.
The economic difficulties in 1997 and 1998 caused an increase in Korean
banks' non-performing assets and a decline in capital adequacy ratios of Korean
banks. From 1998 through 2002, the Financial Supervisory Commission amended
banking regulations several times to adopt more stringent definitions for
non-performing loans that more closely followed international standards. The
new definitions increased the level of non-performing loans held by banks and
other financial institutions. The following table sets out the total loans and
discounts and non-performing assets of the banking sector.
Non-Performing Percentage
Total Loans Assets of Total
----------- -------------- ------------
(in trillions of won) (percentage)
December 31, 1999. 328.3 27.4 8.3
December 31, 2000. 361.6 23.9 6.6
December 31, 2001. 379.1 11.0 2.9
September 30, 2002 451.3 8.8 1.9
- --------
Source: Banking Statistics, December 2002; Financial Supervisory Service.
35
Most of the growth in total loans since the end of 1999, and in particular,
since the end of 2001, has been attributable to loans to the retail sector,
accounting for 49.4% of total loans as of September 30, 2002, compared to 35.6%
as of December 31, 1999.
In March 2002, the Financial Supervisory Commission announced that a group
of the Republic's banks, including nine nationwide commercial banks, six
regional commercial banks and five special banks, posted an aggregate net
profit of (Won)4.7 trillion in 2001, compared to an aggregate net loss of
(Won)4.2 trillion in 2000.
Non-Bank Financial Institutions
Non-bank financial institutions include:
. investment institutions, including merchant banks, securities investment
trust companies and the Korea Securities Finance Corporation;
. savings institutions, including trust accounts of banks, mutual savings
and finance companies, credit unions, mutual credit facilities, community
credit cooperatives and postal savings;
. life insurance institutions; and
. credit card companies.
As of December 31, 2002, three merchant banks are currently operating in the
country. Since 1998, 28 merchant banks have been closed or merged into
commercial banks or securities firms. As of September 30, 2002, assets of all
merchant banks totaled (Won)2,993.0 billion.
Through December 2001, each of five securities investment trust companies
which managed and sold securities investment trusts was converted into an
investment trust management company which only manages the trusts and a
securities company. As of January 20, 2003, 31 securities investment trust
management companies, which manage the trusts, operate in Korea. Currently,
there is no securities investment trust company that also sells interests in
the trusts in the Republic. As of January 20, 2003, total assets of all the
securities investment trust companies totaled (Won)1,804.2 billion.
Korean banks provide trust account management services pursuant to Korean
law applicable to trusts. Banks segregate trust assets and cannot use them to
satisfy claims of depositors or other creditors. Accordingly, trust accounts
appear separately from banking accounts in the banks' financial statements. As
of December 31, 2002, assets of trust accounts of all banks providing trust
account management services totaled (Won)130,857.9 billion.
The country had 116 mutual savings banks as of November 30, 2002, with
assets totaling (Won)25,100.1 billion.
As of December 30, 2002, 14 domestic life insurance institutions, three
branches of foreign companies and six wholly-owned subsidiaries of foreign life
insurance companies, with assets totaling approximately (Won)159 trillion as of
November 30, 2002, served the Republic.
As of December 31, 1999, seven credit card companies operated in the country
with loans totaling approximately (Won)7.8 trillion, of which 8.1% were
classified as non-performing loans. As of September 30, 2002 ten credit card
companies operated in the country with loans totaling approximately (Won)29.6
trillion, of which 9.2% were classified as non-performing loans.
Money Markets
In Korea, the money markets consist of the call market and markets for a
wide range of other short-term financial instruments, including treasury bills,
monetary stabilization bonds, negotiable certificates of deposits, repurchase
agreements and commercial paper.
Securities Markets
As of January 31, 2003, 44 domestic securities companies (including joint
venture securities companies) and 17 branches of foreign securities companies
operated in Korea.
The Korea Stock Exchange, a non-profit corporation wholly owned by its
member firms began operations in 1956 and is Korea's only stock exchange. It
has a single trading floor located in Seoul. The exchange imposes
36
daily limits on share price movements to avoid excessive fluctuation. The Korea
Composite Stock Price Index is comprised of all equities listed on the
exchange. The exchange opened a stock index futures market in May 1996 and an
options market in July 1997.
In addition to the Korea Stock Exchange, Korea has two over-the-counter
stock markets. The KOSDAQ Stock Market was established in July 1996, and the
OTC Bulletin Board Market was launched in March 2000 for trading of shares not
listed on either the Korea Stock Exchange or the KOSDAQ Stock Market.
The following table shows the value of the Korea Composite Stock Price Index.
December 27, 1997..... 376.3
December 28, 1998..... 562.5
December 28, 1999..... 1,028.1
December 26, 2000..... 504.6
January 31, 2001... 617.9
February 28, 2001.. 578.1
March 30, 2001..... 523.2
April 30, 2001..... 577.4
May 31, 2001....... 612.2
June 29, 2001...... 595.1
July 31, 2001...... 541.6
August 31, 2001.... 545.1
September 28, 2001. 479.7
October 31, 2001... 537.8
November 30, 2001.. 643.9
December 28, 2001..... 693.7
January 31, 2002... 748.1
February 28, 2002.. 820.0
March 29, 2002..... 895.6
April 30, 2002..... 842.3
May 31, 2002....... 796.4
June 28, 2002...... 742.7
July 31, 2002...... 718.0
August 30, 2002.... 736.4
September 30, 2002. 646.4
October 31, 2002... 658.9
November 29, 2002.. 724.8
December 30, 2002..... 627.6
January 30, 2003... 591.9
On December 27, 1997, the last day of trading in 1997, the index stood at
376.3, a sharp decline from 647.1 on September 30, 1997. The fall resulted from
growing concerns about the Republic's weakening financial and corporate
sectors, the Republic's falling foreign currency reserves, the sharp
depreciation of the Won against the U.S. Dollar and other external factors,
such as a sharp decline in stock prices in Hong Kong on October 24, 1997 and
financial turmoil in Southeast Asian countries. The Korea Composite Stock Price
Index rose to 1,028.1 on December 28, 1999, but has since been volatile. The
index was 600.4 on February 3, 2003.
Supervision System
The Office of Bank Supervision, the Securities Supervisory Board, the
Insurance Supervisory Board and all other financial sector regulatory bodies
merged in January 1999 to form the Financial Supervisory Commission. The
Financial Supervisory Commission acts as the executive body over the Financial
Supervisory Service. The Financial Supervisory Commission reports to, but
operates independently of, the Prime Minister's office.
37
The Ministry of Finance and Economy focuses on financial policy, foreign
currency regulations and the approval process for establishing financial
institutions. The Bank of Korea manages monetary policy focusing on price
stabilization.
Insurance System
The Republic's deposit insurance system insures amounts on deposit with
banks, non-bank financial institutions, securities companies and life insurance
companies.
Since January 2001, deposits at any single financial institution are insured
only up to (Won)50 million regardless of the amount deposited.
The Government recently excluded certain deposits, such as repurchase
agreements, from the insurance scheme, expanded the definition of unsound
financial institutions to which the insurance scheme would apply and increased
the insurance premiums payable by insured financial institutions.
Monetary Policy
The Bank of Korea
The Bank of Korea was established in 1950 as Korea's central bank and the
country's sole currency issuing bank. A seven-member Monetary Policy Committee,
chaired by the Governor of The Bank of Korea, formulates and controls monetary
and credit policies.
The core inflation rate, which is the consumer price index adjusted to
remove the non-cereal agriculture and petroleum components, is used as The Bank
of Korea's target indicator. To achieve its established inflation target, the
Monetary Policy Committee of The Bank of Korea determines and announces its
overnight call rate target on a monthly basis. The Bank of Korea uses open
market operations as its primary instrument to keep the call rate in line with
the Monetary Policy Committee's target rate. In addition, The Bank of Korea is
able to establish policies regarding its lending to banks in Korea and their
reserve requirements.
Interest Rates
Interest rates gradually have been deregulated under a four-stage plan
initiated in August 1991. In July 1997, some elements of the fourth and final
stage of the plan were put in place. As of the end of 2002, all deposit and
lending rates had been deregulated with the exception of those on demand
deposits, which are scheduled to be deregulated in the near future.
Money Supply
The following table shows the volume of the Republic's money supply:
Money Supply
December 31,
----------------------------------------------------------------
1997 1998 1999 2000 2001 2002
--------- --------- --------- --------- --------- ---------
(billions of won)
Money Supply (M1)(1)........ 35,036.1 35,582.5 44,374.5 46,997.0 53,505.5 63,225.0
Quasi-money(2).............. 168,495.4 222,955.9 284,942.9 366,051.8 414,071.7 455,903.2
Money Supply (M2)........... 203,531.5 258,538.4 329,317.4 413,048.8 467,577.2 519,128.2
Percentage Increase Over
Previous Year.......... 14.1% 27.0% 27.4% 25.4% 13.2% 11.0%
- --------
(1) Consists of cash and demand deposits.
(2) Includes time and savings deposits and residents' foreign currency deposits
at financial institutions.
Source: The Bank of Korea.
38
Exchange Controls
Authorized foreign exchange banks, as approved by the Ministry of Finance
and Economy, handle foreign exchange transactions. The ministry has designated
other types of financial institutions to handle foreign exchange transactions
on a limited basis.
Korean laws and regulations generally require the approval of, or a report
to, either the Ministry of Finance and Economy, The Bank of Korea or authorized
foreign exchange banks, as applicable, for issuances of international bonds and
other instruments, overseas investments and certain other transactions
involving foreign exchange payments.
In 1994 and 1995, the Government relaxed regulations of foreign exchange
position ceilings and foreign exchange transaction documentation and created
free Won accounts. In December 1996, after joining the OECD, the Republic freed
the repatriation of investment funds, dividends and profits, as well as loan
repayments and interest payments. The Government continues to reduce exchange
controls in response to changes in the world economy, including the new trade
regime under the WTO, anticipating that such foreign exchange reform will
improve the Republic's competitiveness and encourage strategic alliances
between domestic and foreign entities.
In September 1998 the National Assembly passed the Foreign Exchange
Transaction Act, which became effective in April 1999 and was subsequently
amended in October 2000. In principle, most currency and capital transactions,
including, among others, the following transactions have been liberalized:
. the investment in real property located overseas by Korean companies and
financial institutions;
. the establishment of overseas branches and subsidiaries by Korean
companies and financial institutions;
. the investment by non-residents in deposits and trust products having
more than one year maturities; and
. the issuance of debentures by non-residents in the Korean market.
To minimize the adverse effects from further opening of Korean capital
markets, the Ministry of Finance and Economy is authorized to introduce a
variable deposit requirement system to restrict the influx of short-term
speculative funds.
The Government has also embarked on a second set of liberalization
initiatives starting in January 2001, under which ceilings on international
payments for Korean residents have been eliminated, including overseas travel
expenses, overseas inheritance remittances and emigration expenses. Overseas
deposits, trusts, acquisitions of foreign securities and other foreign capital
transactions made by residents and the making of deposits in Korean currency
made by non-residents have also been liberalized. In line with the foregoing
liberalization, measures will also be adopted to curb illegal foreign exchange
transactions and to stabilize the foreign exchange market.
39
Foreign Exchange
The following table shows the exchange rate between the Won and the U.S.
Dollar (in Won per U.S. Dollar) as announced by the Korea Financial
Telecommunications and Clearings Institute.
Exchange Rates
Won/U.S. Dollar
Exchange Rate
---------------
December 31, 1996.. 844.2
December 31, 1997.. 1,415.2
December 31, 1998.. 1,207.8
December 30, 1999.. 1,145.4
December 29, 2000.. 1,259.7
January 31, 2001.. 1,265.5
February 28, 2001. 1,245.7
March 30, 2001.... 1,314.0
April 30, 2001.... 1,324.7
May 31, 2001...... 1,292.9
June 30, 2001..... 1,300.7
July 31, 2001..... 1,301.4
August 31, 2001... 1,283.8
September 29, 2001 1,309.1
October 31, 2001.. 1,296.1
November 30, 2001. 1,274.0
December 31, 2001.. 1,326.1
January 31, 2002.. 1,314.8
February 28, 2002. 1,327.7
March 30, 2002.... 1,326.4
April 30, 2002.... 1,292.2
May 31, 2002...... 1,233.3
June 29, 2002..... 1,201.8
July 31, 2002..... 1,197.0
August 31, 2002... 1,200.5
September 30, 2002 1,225.5
October 31, 2002.. 1,233.4
November 30, 2002. 1,208.0
December 31, 2002.. 1,200.4
January 30, 2003.. 1,170.5
Prior to November 1997, the Government permitted exchange rates to float
within a daily range of 2.25%. In response to the substantial downward
pressures on the Won caused by the Republic's economic difficulties in late
1997, in November 1997, the Government expanded the range of permitted daily
exchange rate fluctuations to 10%. The Government eliminated the daily exchange
rate band in December 1997, and the Won now floats according to market forces.
The value of the Won relative to the U.S. dollar depreciated from (Won)888.1 to
US$1.00 on June 30, 1997 to (Won)1,964.8 to US$1.00 on December 24, 1997. Due
to improved economic conditions and increases in trade surplus, the Won has
generally appreciated against the U.S. dollar. The market average exchange rate
was (Won)1,178.7 to US$1.00 on February 3, 2003.
40
Government Finance
The Ministry of Planning and Budget prepares the Government budget, and the
Ministry of Finance and Economy administers the Government's finances.
The Government's fiscal year commences on January 1. The Ministry of
Planning and Budget must submit the budget to the National Assembly not later
than 90 days prior to the start of the fiscal year and may submit supplementary
budgets revising the original budget at any time during the fiscal year.
The following table shows consolidated Government revenues and expenditures.
Consolidated Central Government Revenues and Expenditures
1997 1998 1999 2000 2001
------- ------- ------- ------- -------
(billions of won)
Total Revenues....................................... 93,368 96,673 107,923 135,811 144,033
Current Revenues.................................... 92,073 95,790 106,537 134,415 142,709
Total Tax Revenues................................ 69,928 67,798 75,658 92,935 95,793
Income Profits and Capital Gains................ 24,292 27,975 25,220 35,387 35,638
Tax on Property................................. 1,590 1,379 3,272 4,262 2,920
Tax on Goods and Services....................... 30,650 27,159 33,608 38,020 43,818
Customs Duties.................................. 5,798 3,836 4,687 5,800 5,923
Others.......................................... 7,598 7,449 8,871 9,466 7,494
Social Security Contribution...................... 8,506 10,512 12,008 14,798 17,538
Non-Tax Revenues.................................. 13,639 17,480 18,871 26,682 29,378
Capital Revenues.................................... 1,295 883 1,386 1,396 1,324
Total Expenditures and Net Lending................... 100,327 115,430 120,988 129,284 136,765
Total Expenditures.................................. 81,604 90,990 101,236 109,443 126,688
Current Expenditures.............................. 32,813 70,631 76,798 87,170 101,744
Goods and Services.............................. 21,147 21,697 19,772 24,707 26,223
Interest Payments............................... 2,258 3,399 5,884 6,888 7,198
Subsidies and Other Transfers(1)................ 38,492 44,430 49,333 55,114 66,540
Subsidies..................................... 561 576 432 329 534
Other Transfers(1)............................ 37,931 43,854 48,901 54,785 66,006
Non-Financial Public Enterprises Expenditures... 916 1,105 1,809 461 1,783
Capital Expenditures.............................. 18,791 20,359 24,438 22,273 24,944
Net Lending......................................... 18,723 24,440 19,752 19,841 10,077
- --------
(1) Include transfers to local governments, non-profit institutions and
households.
Source: Ministry of Finance and Economy.
The consolidated Government account consists of a General Account, Special
Accounts (including a non-financial public enterprise special account) and
Public Funds. The Government segregates the accounts of certain functions of
the Government into Special Accounts and Public Funds for more effective
administration and fiscal control. The Special Accounts and Public Funds relate
to business type activities, such as economic development, road and railway
construction and maintenance, monopolies, and communications developments and
the administration of loans received from official international financial
organizations and foreign governments.
Revenues derive mainly from national taxes and non-tax revenues.
Expenditures include general administration, national defense, community
service, education, health, social security, certain annuities and pensions and
local finance, which involves the transfer of tax revenues to local governments.
Tax revenues decreased slightly in 1998 because of the country's economic
difficulties. Expenditures increased significantly in 1998 resulting from the
Government's program to restructure the country's economy
41
and its debt obligations under the financial aid package extended by the IMF.
Although the Government reduced expenditures in other budget areas, such as
defense and general administration, a fiscal deficit was recorded in 1998 equal
to approximately 4.2% of the Republic's GDP, financed in part by approximately
(Won)11.7 trillion of Government bonds issued in the domestic market in 1998.
For 1999, revenues increased by approximately 11.6% to 22.4% of the
Republic's GDP, due in large part to higher tax and non-tax revenue. The
Government expanded the value added tax base further and reduced the tax rate
on real estate capital gains. The Government imposed modest cuts in several
expenditure categories relative to 1998, including wages and salaries, purchase
of goods and services, capital spending and net lending to help offset an
anticipated increase in interest payments, including the carrying costs for
financial sector restructuring. Fiscal deficit in 1999 decreased to
approximately 2.7% of GDP.
For 2000, revenues increased by approximately 25.8% to 26.0% of the
Republic's GDP principally due to higher tax and non-tax revenue. Tax revenues
increased significantly while expenditures increased slightly due to the
country's economic recovery. Principal factors for the tax revenue increase
included:
. increase of corporate tax revenues due to increase of corporate profits;
. expansion of the tax base;
. increase of securities trading tax due to increase of trading volume; and
. increase of customs duties due to increase of imports.
The Republic had a fiscal surplus of 1.3% in 2000.
For 2001, revenue increased by approximately 6.1% to 26.4% of the Republic's
GDP principally due to higher tax and non-tax revenue. The tax revenue
increased due to the country's economic growth and the accompanying increase in
the overall compensation of workers in Korea. The non-tax revenue increased due
to the sale by the Government of the shares it owns in Korean companies such as
KT Corporation (formerly known as Korea Telecom Corp.) and Korea Tobacco &
Ginseng Corporation as part of the Government's privatization plans. The
Republic had a fiscal surplus of 1.3% in 2001.
Debt
External and Internal Debt of the Government
The following table sets out, by currency and the equivalent amount in U.S.
Dollars, the estimated outstanding direct external debt of the Government as of
December 31, 2001.
Direct External Debt of the Government
Amount in Equivalent
Original Amount in
Currency U.S. Dollars(1)
-------------- ---------------
(in millions)
US$......... US$ 14,296.5 US$14,296.5
German Mark. DM 78.3 35.4
Japanese Yen (Yen)121,819.6 927.3
-----------
Total.... US$15,259.2
===========
- --------
(1) Amounts expressed in currencies other than US$ are converted to US$ at the
arbitrage rate announced by the Seoul Money Brokerage Services, Ltd.
(formerly the Korea Financial Telecommunications and Clearings Institute)
in effect on December 31, 2001.
42
The following table summarizes, as of December 31 of the years indicated,
the outstanding direct internal debt of the Republic.
Direct Internal Debt of the Government
(billions of won)
1997... 35,132.3
1998... 47,588.6
1999... 66,145.3
2000... 75,847.6
2001(1) 87,327.5
-----
(1) Estimated.
The following table sets out all guarantees by the Government of
indebtedness of others:
December 31,
---------------------------
1999 2000 2001
-------- -------- ---------
(billions of won)
Domestic... 78,211.8 70,779.5 103,338.5
External(1) 3,292.8 3,785.9 3,431.1
-------- -------- ---------
Total... 81,504.6 74,565.4 106,769.6
======== ======== =========
- --------
(1) Converted to Won at foreign exchange banks' telegraphed transfer selling
rates to customers in effect on December 31 of each year.
For further information on the outstanding indebtedness, including
guarantees, of the Republic, see "The Republic of Korea--Tables and
Supplementary Information".
In December 1997, the National Assembly authorized the guarantee of up to
US$20 billion of external debt of Korean banks, and, in January 1998,
additional guarantees of up to US$7 billion of external debt of Korean
commercial and merchant banks and up to US$8 billion of external debt of The
Bank of Korea. The Government guaranteed approximately US$21.8 billion in new
one-, two- and three-year loans that replaced the short-term foreign currency
debt of eligible Korean financial institutions, all of which has subsequently
been repaid. For a further discussion of this program, see "The Republic of
Korea--The Economy--Post-IMF Reforms".
In April 1998, the Government issued US$4.0 billion of U.S.
Dollar-denominated debt securities in addition to the World Bank and ADB
obligations incurred in 1998.
43
External Debt
The following table sets out certain information regarding Korea's total
external debt calculated using criteria agreed with the IMF. In particular,
this information includes offshore borrowings by Korean banks, including their
overseas branches and subsidiaries, but excludes borrowings by overseas
branches and subsidiaries of Korean companies and deposits in overseas branches
and subsidiaries of Korean banks.
December 31,
-----------------------------------
1997 1998 1999 2000 2001 2002
----- ----- ----- ----- ----- ----
(billions of dollars)
Total External Liabilities.......... 159.2 148.7 137.1 131.7 118.8 131.0
Long-Term Debt..................... 95.7 118.0 97.8 83.8 77.8 81.2
Public Sector.................... 22.3 36.6 29.5 28.3 20.8 19.7
Domestic Financial Institutions.. 43.2 45.8 43.5 22.5 20.1 19.3
Korean Branches of Foreign Banks. 4.4 6.3 4.0 2.6 2.7 3.1
Private Sector................... 25.9 29.4 29.9 30.4 34.2 39.1
Short-Term Debt.................... 63.6 30.7 39.2 47.9 41.0 49.8
Domestic Financial Institutions.. 27.2 11.3 12.7 15.3 13.1 17.3
Korean Branches of Foreign Banks. 15.2 7.6 9.8 10.4 9.1 13.9
Private Sector................... 21.2 11.8 16.7 22.2 18.8 18.6
- --------
Source: Ministry of Finance and Economy.
Debt Record
The Government has always paid when due the full amount of principal of,
interest on, and amortization or sinking fund requirements of, its indebtedness.
44
Tables and Supplementary Information
A. External Debt of the Government(1)
Range of Principal Amounts
Range of Range of Years of Outstanding as of
Currency of Borrowings Interest Rates Years of Issue Maturity December 31, 2001
- ---------------------- --------------- -------------- --------- -------------------
(%) (millions of units)
US$.............. 0.75-9/Floating 1960-1998 2001-2023 US$ 14,296.5
Japanese Yen..... 3.25-5 1980-1990 2005-2015 (Yen)121,819.6
German Mark...... 2-4.5 1973-1985 2001-2021 DM 78.3
Total External Funded Debt(2)............................ US$ 15,259.2
- --------
(1) Estimated.
(2) Amounts expressed in currencies other than US$ are converted to US$ at the
arbitrage rate between foreign currencies announced by the Korea Financial
Telecommunications and Clearings Institute in effect on December 31, 2001.
B. External Guaranteed Debt of the Government
Principal Amounts
Interest Years of Years of Outstanding as of
Name Rates Issue Maturity December 31, 2001(1)
- ---- -------- -------- -------- ---------------------
(%) (millions of dollars)
1. Bonds
Total Bonds......................................... None
2. Borrowings
City of Seoul............... 9.4 1976 2003 0.5
City of Busan............... Floating 1987 2002 2.0
City of Taegu............... Floating 1988 2003 3.8
Korea Electric Power Corp... Floating 1999 2006 700.6
Korea District Heating Corp. Floating 1986 2003 5.6
Korea Gas Corp.............. Floating 1999 2006 231.7
The Korea Development Bank.. Floating 1999 2009 203.3
The Korea Development Bank.. Floating 1998 2003 246.8
Industrial Bank of Korea.... Floating 1999 2006 1,168.2
-------
Total Borrowings(2)......................... 2,562.5
-------
Total External Guaranteed Debt(2)..... 2,562.5
=======
- --------
(1) Estimated.
(2) Amounts expressed in currencies other than US$ are converted to US$ at the
arbitrage rate between foreign currencies announced by the Korea Financial
Telecommunications and Clearings Institute in effect on December 31, 2001.
45
C. Internal Debt of the Government
Range of Range of Principal Amounts
Range of Years of Years of Outstanding as of
Title Interest Rates Issue Maturity December 31, 2001(1)
- ----- -------------- --------- --------- --------------------
(%) (billions of won)
1. Bonds
Interest-Bearing Treasury Bond for Cereals
Fund...................................... 2.0-17.0 1995-1999 2000-2004 2,126.1
Foreign Exchange Stabilization Bonds........ 6.97-14.48 1995-2000 2000-2005 8,699.9
Interest-Bearing Treasury Bond for Treasury
Bond Management Fund...................... 5.55-18.4 1995-2000 2001-2010 50,919.0
Interest-Bearing Treasury Bond for National
Housing I................................. 5.0 1990-2000 1995-2005 17,408.8
Interest-Bearing Treasury Bond for National
Housing II................................ 3.0 1983-1999 2003-2019 3,236.2
Interest-Bearing Treasury Bond for
Purchasing Private Land................... 8.2-13.5 1995-2000 2001-2003 0.1
Non-interest-Bearing Treasury Bond for
Contribution(2)........................... -- 1967-1985 -- 11.3
--------
Total Bonds......................................................... 82,401.4
--------
2. Borrowings
Borrowing from the Bank of Korea............... 590.0
Borrowing from the Sports Promotion Fund....... 99.8
Borrowing from the Civil Servant Pension Fund.. 690.0
Borrowing from the Export Insurance Fund....... 610.0
Borrowing from the Korea Development Bank...... 114.2
Authorized Government Debt beyond Budget Limit. 2,822.1
--------
Sub-Total.................................. 4,926.1
--------
Total Internal Funded Debt.............. 87,327.5
========
- --------
(1) Estimated.
(2) Interest Rates and Years of Maturity not applicable.
46
D. Internal Guaranteed Debt of the Government
Principal
Amounts
Range of Range of Range of Outstanding as
Interest Years of Years of of December 31,
Name Rates Issue Maturity 2001(1)
- ---- --------- --------- --------- -----------------
(%) (billions of won)
1. Bonds of Government-Affiliated Corporations
The Korea Development Bank.................. Floating 1989-1994 2002-2004 14.9
Korea Container Terminal Authority.......... 6.0% 1993-1996 2002-2005 140.0
Korea Asset Management Corporation.......... 5.0-12.14% 1997-1999 2002-2004 15,319.3
Korea Deposit Insurance Corporation......... 0.0-15% 1998-2001 1995-2008 82,035.9(2)
--------
Total Bonds..................................................... 97,510.1
========
2. Borrowings of Government-Affiliated Corporations
Rural Development Corporation and Federation of
Farmland....................................... 5.5% 1967-1989 2000-2024 236.2
National Agricultural Cooperative Federation..... 5.0% 2001 2002 370.0
Others........................................... Floating 1991 1999 1,205.1
-------
Total Borrowings................................................... 1,811.3
=======
- --------
(1) Estimated.
(2) (Won)49 trillion of such debt will be converted to the direct debt of the
Government over four years beginning in 2003.
47
DESCRIPTION OF THE DEBT SECURITIES
The Republic will issue debt securities under a fiscal agency agreement or
agreements. The term "debt securities", as used in this prospectus, refers to
all debt securities issued and issuable from time to time under such fiscal
agency agreement or agreements. The description below summarizes the material
provisions of the debt securities and the fiscal agency agreement. Since it is
only a summary, the description may not contain all of the information that may
be important to you as a potential investor in the debt securities. Therefore,
you should read the form of fiscal agency agreement and the form of global debt
security before deciding whether to invest in the debt securities. The Republic
has filed a copy of these documents with the Securities and Exchange Commission
as exhibits to the registration statement of which this prospectus is a part.
You should refer to such exhibits for more complete information.
The financial terms and other specific terms of your debt securities will be
described in the prospectus supplement relating to your debt securities. The
description in the prospectus supplement will supplement this description or,
to the extent inconsistent with this description, replace it.
The Republic will appoint a fiscal agent or agents in connection with debt
securities whose duties will be governed by the fiscal agency agreement. The
Republic may replace the fiscal agent or appoint different fiscal agents for
different series of debt securities.
General Terms of the Debt Securities
The Republic may issue debt securities in separate series at various times.
The prospectus supplement that relates to your debt securities will specify
some or all of the following terms:
. the aggregate principal amount;
. the currency of denomination and payment;
. any limitation on principal amount and authorized denominations;
. the percentage of their principal amount at which the debt securities
will be issued;
. the maturity date or dates;
. the interest rate for the debt securities and, if variable, the method by
which the interest rate will be calculated;
. whether any amount payable in respect of the debt securities will be
determined based on an index or formula, and how any such amount will be
determined;
. the dates from which interest, if any, will accrue for payment of
interest and the record dates for any such interest payments;
. where and how the Republic will pay principal and interest;
. whether and in what circumstances the debt securities may be redeemed
before maturity;
. any sinking fund or similar provision;
. whether any part or all of the debt securities will be in the form of a
global security and the circumstances in which a global security is
exchangeable for certificated securities;
. if issued in certificated form, whether the debt securities will be in
bearer form with interest coupons, if any, or in registered form without
interest coupons, or both forms, and any restrictions on exchanges from
one form to the other; and
. other specific provisions.
48
The Republic may issue debt securities at a discount below their stated
principal amount, bearing no interest or interest at a rate which at the time
of issuance is below market rates.
Depending on the terms of the debt securities issued by the Republic, the
prospectus supplement relating to the debt securities may also describe
applicable U.S. federal income tax and other considerations additional to the
disclosure in this prospectus.
Payments of Principal, Premium and Interest
On every payment date specified in the relevant prospectus supplement, the
Republic will pay the principal, premium and interest due on that date to the
registered holder of the relevant debt security at the close of business on the
related record date. The Republic will make all payments at the place and in
the currency set out in the prospectus supplement. Unless otherwise specified
in the relevant prospectus supplement or the debt securities, the Republic will
make payments in U.S. dollars at the New York office of the fiscal agent or,
outside the United States, at the office of any paying agent. Unless otherwise
specified in the applicable prospectus supplement or debt securities, the
Republic will pay interest by check, payable to the registered holder.
The Republic will make any payments on debt securities in bearer form at the
offices and agencies of the fiscal agent or any other paying agent outside the
United States as the Republic may designate. At the option of the holder of the
bearer debt securities, the Republic will make such payments by check or by
transfer to an account maintained by the holder with a bank located outside of
the United States. The Republic will not make payments on bearer debt
securities at the corporate trust office of the fiscal agent in the United
States or at any other paying agency in the United States. In addition, the
Republic will not make any payment by mail to an address in the United States
or by transfer to an account maintained by a holder of bearer debt securities
with a bank in the United States. Nevertheless, the Republic will make payments
on a bearer debt security denominated and payable in U.S. dollars at an office
or agency in the United States if:
. payment outside the United States is illegal or effectively precluded by
exchange controls or other similar restrictions; and
. the payment is then permitted under United States law, without material
adverse consequences to the Republic.
If the Republic issues bearer debt securities, the Republic will designate
the offices of at least one paying agent outside the United States as the
location for payment.
Repayment of Funds; Prescription
Any funds held by the fiscal agent or paying agent in respect of any debt
securities remaining unclaimed for two years after those amounts have become
due and payable will be returned by the fiscal agent or paying agent to the
Republic. After such repayment, the fiscal agent or paying agent will not be
liable with respect to the amounts so repaid, and you may look only to the
Republic for any payment under the debt securities.
Under Korean law, you will not be permitted to file a claim against the
Republic for payment of principal or interest on any series of debt securities
unless you do so within five years, in the case of principal, and two years, in
the case of interest, from the date on which payment was due.
Global Securities
The prospectus supplement relating to a series of debt securities will
indicate whether any of that series of debt securities will be represented by a
global security. The prospectus supplement will also describe any unique
specific terms of the depositary arrangement with respect to that series.
Unless otherwise specified in the prospectus supplement, the Republic
anticipates that the following provisions will apply to depositary arrangements.
49
Registered Ownership of the Global Security
The global security will be registered in the name of a depositary
identified in the prospectus supplement, or its nominee, and will be deposited
with the depositary, its nominee or a custodian. The depositary, or its
nominee, will therefore be considered the sole owner or holder of debt
securities represented by the global security for all purposes under the fiscal
agency agreement. Except as specified below or in the applicable prospectus
supplement, beneficial owners:
. will not be entitled to have any of the debt securities represented by
the global security registered in their names;
. will not receive physical delivery of any debt securities in definitive
form;
. will not be considered the owners or holders of the debt securities;
. must rely on the procedures of the depositary and, if applicable, any
participants (institutions that have accounts with the depositary or a
nominee of the depositary, such as securities brokers and dealers) to
exercise any rights of a holder; and
. will receive payments of principal and interest from the depositary or
its participants rather than directly from us.
The Republic understands that, under existing industry practice, the
depositary and participants will allow beneficial owners to take all actions
required of, and exercise all rights granted to, the registered holders of the
debt securities.
The Republic will register debt securities in the name of a person other
than the depositary or its nominee only if:
. the depositary for a series of debt securities is unwilling or unable to
continue as depositary; or
. the Republic determines, in its sole discretion, not to have a series of
debt securities represented by a global security.
In either such instance, an owner of a beneficial interest in a global
security will be entitled to registration of a principal amount of debt
securities equal to its beneficial interest in its name and to physical
delivery of the debt securities in definitive form.
Beneficial Interests in and Payments on a Global Security
Only participants, and persons that may hold beneficial interests through
participants, can own a beneficial interest in the global security. The
depositary keeps records of the ownership and transfer of beneficial interests
in the global security by its participants. In turn, participants keep records
of the ownership and transfer of beneficial interests in the global security by
other persons (such as their customers). No other records of the ownership and
transfer of beneficial interests in the global security will be kept.
All payments on a global security will be made to the depositary or its
nominee. When the depositary receives payment of principal or interest on the
global security, the Republic expects the depositary to credit the depositary's
participants' accounts with amounts that correspond to their respective
beneficial interests in the global security. The Republic also expects that,
after the participants' accounts are credited, the participants will credit the
accounts of the owners of beneficial interests in the global security with
amounts that correspond to the owners' respective beneficial interests in the
global security.
The depositary and its participants establish policies and procedures
governing payments, transfers, exchanges and other important matters that
affect owners of beneficial interests in a global security. The depositary and
its participants may change these policies and procedures from time to time.
The Republic has no
50
responsibility or liability for the records of ownership of beneficial
interests in the global security, or for payments made or not made to owners of
such beneficial interests. The Republic also has no responsibility or liability
for any aspect of the relationship between the depositary and its participants
or for any aspect of the relationship between participants and owners of
beneficial interests in the global security.
Bearer Securities
The Republic may issue debt securities in a series in the form of one or
more bearer global debt securities deposited with a common depositary for the
Euroclear and Clearstream, or with a nominee identified in the applicable
prospectus supplement. The specific terms and procedures, including the
specific terms of the depositary arrangement, with respect to any portion of a
series of debt securities to be represented by a global security will be
described in the applicable prospectus supplement.
Additional Amounts
The Republic will make all payments of principal of, and premium and
interest, if any, on the debt securities without withholding or deducting any
present or future taxes imposed by the Republic or any of its political
subdivisions, unless required by law. In that event, the Republic will pay
additional amounts as necessary to ensure that you receive the same amount as
you would have received without such withholding or deduction.
The Republic will not pay, however, any additional amounts if you are liable
for Korean tax because:
. you are connected with the Republic other than by merely owning the debt
security or receiving income or payments on the debt security;
. you failed to comply with any certification or other reporting
requirement concerning your nationality, residence, identity or
connection with the Republic, or any of its political subdivisions or
taxing authorities, and the Republic, or any of its political
subdivisions or taxing authorities requires compliance with these
reporting requirements as a precondition to exemption from Korean
withholding taxes; or
. you failed to present your debt security for payment within 30 days of
when the payment is due or, if the fiscal agent did not receive the money
prior to the due date, the date notice is given to holders that the
fiscal agent has received the full amount due to holders. Nevertheless,
the Republic will pay additional amounts to the extent you would have
been entitled to such amounts had you presented your debt security for
payment on the last day of the 30-day period.
The Republic will not pay any additional amounts for taxes on the debt
securities except for taxes payable through deduction or withholding from
payments of principal, premium or interest. Examples of the types of taxes for
which the Republic will not pay additional amounts include the following:
estate or inheritance taxes, gift taxes, sales or transfer taxes, personal
property or related taxes, assessments or other governmental charges. The
Republic will pay stamp or other similar taxes that may be imposed by the
Republic, the United States or any political subdivision or taxing authority in
one of those two countries on the fiscal agency agreement or be payable in
connection with the issuance of the debt securities.
Status of Debt Securities
The debt securities will:
. constitute the Republic's direct, unconditional, unsecured and
unsubordinated obligations;
. rank at least equally in right of payment among themselves, regardless of
when issued or currency of payment; and
. rank at least equally in right of payment with all of the Republic's
existing and future unsecured and unsubordinated External Indebtedness.
51
"External Indebtedness" means all obligations of the Republic in respect of
money borrowed and guarantees given by the Republic in respect of money
borrowed by others, payable by its terms or at the option of its holder in any
currency other than the currency of Korea.
Negative Pledge Covenant
If any debt securities of a series are outstanding, the Republic will not
create or permit to subsist any Security Interests on the Republic's assets as
security for any of the Republic's Public External Indebtedness unless the debt
securities are secured equally and ratably with such Public External
Indebtedness. However, the Republic may create or permit Security Interests:
(a) upon any property or asset (or any interest in properties or assets) at
the time of their purchase, improvement, construction, development or
redevelopment, solely as security for the payment of the purchase,
improvement, construction, development or redevelopment costs of such
property or assets, provided that (1) such Security Interest does not
extend to any other assets or revenues of the Republic and (2) in the
case of construction, the Security Interest may extend to unimproved
real property for the construction;
(b) securing Public External Indebtedness incurred for the purpose of
financing all or part of the costs of the acquisition, construction or
development of a project, provided that (1) the holders of the Public
External Indebtedness expressly agree to limit their recourse to the
assets and revenues of the project as their principal source of
repayment and (2) the property over which the Security Interest is
granted consists solely of the assets and revenues of the project
(provided that in the case of construction, the Security Interest may
extend to unimproved real property for the construction and to any trust
account into which the proceeds of the offering creating such Public
External Indebtedness may be temporarily deposited pending use in
connection with such construction);
(c) arising in the ordinary course of borrowing activities of the Republic
to secure Public External Indebtedness with a maturity of one year or
less;
(d) existing on any property or asset at the time of its acquisition (or
arising after its acquisition pursuant to an agreement entered into
prior to, and not in contemplation of, such acquisition), and extensions
and renewals of such Security Interest limited to the original property
or asset covered thereby and securing any extension or renewal of the
original secured financing;
(e) arising out of the renewal, extension or replacement of any Public
External Indebtedness permitted under paragraphs (a) or (c) above;
provided, however, that the principal amount of such Public External
Indebtedness is not increased;
(f) which (1) arises pursuant to an attachment, distraint or similar legal
process arising in connection with court proceedings so long as the
execution or other enforcement thereof is effectively stayed and in
which the secured claims are being contested in good faith by
appropriate proceedings or (2) secures the reimbursement obligation
under any bond given in connection with the release of property from any
Security Interest referred to in (1) above, provided that in each of (1)
and (2), such Security Interest is released or discharged within one
year of its imposition;
(g) in existence as of the date of issuance of the debt securities of a
series; and
(h) arising by operation of law, provided that the Republic may not create
such Security Interest solely for the purpose of securing any Public
External Indebtedness.
"Security Interest" means any lien, pledge, mortgage, deed of trust, charge
or other encumbrance or preferential arrangement which has the practical effect
of constituting a security interest.
"Public External Indebtedness" means any External Indebtedness represented
by bonds, notes, debentures or other securities that are or were intended to be
quoted, listed or traded on any securities exchange or other securities market.
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The international reserves of The Bank of Korea represent substantially all
of the official gross international reserves of the Republic. Because The Bank
of Korea is an independent entity, the Republic is of the view that
international reserves owned by The Bank of Korea are not subject to the
negative pledge covenant in the debt securities and that The Bank of Korea
could in the future incur Public External Indebtedness secured by such reserves
without securing amounts payable under the debt securities.
Events of Default
Each of the following constitutes an event of default with respect to any
series of debt securities:
(a) the Republic fails to pay principal or interest or premium or deposit
any sinking fund payment on any debt securities of the series when due
and such failure to pay continues for 30 days;
(b) the Republic fails to perform or breaches any of the covenants or
agreements in the series of debt securities (other than non-payment) for
60 days after written notice of the default is delivered to the Republic
at the office of the fiscal agent by holders representing at least 10%
of the aggregate principal amount of the debt securities of the series;
(c) the Republic fails to make any payment in respect of:
(1) Public External Indebtedness (other than Public External Indebtedness
constituting guarantees by the Republic) in an aggregate principal
amount in excess of US$30,000,000, or its equivalent in any other
currency, when due, and such failure continues beyond the applicable
grace period (whether at maturity, upon acceleration by reason of any
default or otherwise); or
(2) any Public External Indebtedness constituting guarantees by the
Republic in an aggregate principal amount in excess of US$30,000,000,
or its equivalent in any other currency, when due (whether at
maturity, upon acceleration by reason of default or otherwise), and
such failure continues until the earlier of (A) the expiration of any
applicable grace period or 30 days, whichever is longer, or (B) the
acceleration of any such Public External Indebtedness by any holder
thereof; or
(d) the Republic declares a moratorium on the payment of any Public External
Indebtedness.
Upon the occurrence of an event of default:
. in the case of any event of default described in clause (b), the holders
of at least 25% in aggregate principal amount of all debt securities of
that series (not counting debt securities held by the Republic) then
outstanding may by written demand given to the Republic, with a copy to
the fiscal agent, declare the debt securities of that series held by it
to be immediately due and payable; or
. in the case of any other event of default, each holder of debt securities
of that series may by written demand given to the Republic, with a copy
to the fiscal agent, declare the debt securities of that series held by
it to be immediately due and payable
and upon such declaration the principal and interest accrued on the relevant
debt securities will become immediately due and payable upon the date that such
written notices are received at the office of the fiscal agent, unless prior to
such date all events of default in respect of the relevant debt securities has
been cured.
You should note that:
. the Republic is not required to provide periodic evidence of the absence
of defaults; and
. the fiscal agency agreement does not require the Republic to notify
holders of the debt securities of an event of default or grant any debt
security holder a right to examine the security register.
53
Modifications and Amendments; Debt Securityholders' Meetings
Each holder of a series of debt securities must consent to any amendment or
modification of the terms of that series of debt securities or the fiscal
agency agreement that would, among other things:
. change the stated maturity of the principal of the debt securities or any
installment of interest;
. reduce the principal amount of, or the interest rate on, or any premium
payable upon redemption of any debt security of such series;
. change the currency or place of payment of principal, interest or premium
on debt securities of that series; or
. reduce the percentage of the outstanding principal amount needed to
modify or amend the fiscal agency agreement or the terms of such series
of debt securities.
The Republic and the fiscal agent may, with the exception of the above
changes, either (a) at a meeting duly called and held as described below, upon
the affirmative vote of the holders of not less than 66 2/3% in aggregate
principal amount of the debt securities of a series then outstanding that are
represented at the meeting or (b) with the written consent of the holders of at
least 66 2/3% in aggregate principal amount of the debt securities of a series
that are outstanding, modify and amend other terms of that series of debt
securities.
The Republic may at any time call a meeting of the holders of a series of
debt securities to seek the holders of the debt securities' approval of the
modification, or amendment, or obtain a waiver, of any provision of that series
of debt securities. The meeting will be held at the time and place in the
Borough of Manhattan in New York City as determined by the Republic. The notice
calling the meeting must be given at least 30 days and not more than 60 days
prior to the meeting.
While an event of default with respect to a series of debt securities is
continuing, holders of at least 10% of the aggregate principal amount of that
series of debt securities may compel the fiscal agent to call a meeting of all
holders of debt securities of that series by providing to the fiscal agent a
written request setting forth in reasonable detail the action proposed to be
taken at the meeting.
Holders of debt securities who hold, in the aggregate, a majority in
principal amount of the debt securities of the series that are outstanding at
the time will constitute a quorum at a meeting. At the reconvening of any
meeting adjourned for a lack of a quorum, the persons entitled to vote 25% in
principal amount of the debt securities of the series that are outstanding at
the time will constitute a quorum for taking any action set out in the original
notice. To vote at a meeting, a person must either hold outstanding debt
securities of the relevant series or be duly appointed as a proxy for a debt
security holder. The fiscal agent will make all rules governing the conduct of
any meeting.
No consent of holders is or will be required for any modification or
amendment requested by the Republic or by the fiscal agent to:
. add covenants made by the Republic that benefit holders of any series of
debt securities;
. surrender any right or power of the Republic;
. provide security or collateral for any series of debt securities;
. cure any ambiguity or correct or supplement any defective provision in
the fiscal agency agreement or any series of debt securities; or
. amend the fiscal agency agreement or any series of debt securities in any
manner which would not be inconsistent with such debt securities and
would not adversely affect the interests of any holder of the affected
debt securities.
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Fiscal Agent
The fiscal agency agreement governs the duties of each fiscal agent. The
Republic may maintain bank accounts and a banking relationship with each fiscal
agent. The fiscal agent is an agent of the Republic and does not act as a
trustee for the holders of the debt securities.
Further Issues of Debt Securities
The Republic may, without the consent of the holders of the debt securities,
create and issue additional debt securities with the same terms and conditions
as any series of debt securities (or that are the same except for the amount of
the first interest payment and for the interest paid on the series of debt
securities prior to the issuance of the additional debt securities). The
Republic may consolidate such additional debt securities with the outstanding
debt securities to form a single series.
The Republic may offer additional debt securities with original issue
discount ("OID") for U.S. federal income tax purposes as part of a further
issue. Purchasers of debt securities after the date of any further issue will
not be able to differentiate between debt securities sold as part of the
further issue and previously issued debt securities of the same series. If the
Republic were to issue further debt securities with OID, purchasers of debt
securities after such further issue may be required to accrue OID (or greater
amounts of OID that they would otherwise have accrued) with respect to their
debt securities. This may affect the price of outstanding debt securities
following a further issue. Purchasers are advised to consult legal counsel with
respect to the implications of any future decision by the Republic to undertake
a further issue of debt securities with OID.
Governing Law, Jurisdiction, Consent to Service and Enforceability
The debt securities will be governed by the laws of the State of New York,
without regard to the conflicts of law principles of the State of New York
(other than Section 5-1401 of the General Obligation Law of the State of New
York), except for the Republic's authorization, execution and delivery and any
other matters that must be governed by the laws of the Republic.
It may be difficult for investors to obtain or enforce judgments against the
Republic. The Republic is a foreign sovereign. Foreign sovereigns are generally
immune from lawsuits and from the enforcement of judgments under U.S. law.
Foreign sovereigns may waive this immunity and limited exceptions to this rule
are spelled out in the U.S. Foreign Sovereign Immunities Act of 1976.
The Republic has agreed to submit to the jurisdiction of any state or
federal court in The City of New York, for lawsuits brought by investors on the
debt securities. Investors may also bring action against the Republic in
appropriate Korean courts. The Republic will appoint its Consul in New York as
its authorized agent to receive any process that may be served in an action
brought by an investor. The Korean Consulate General in New York is located at
335 East 45/th/ Street, New York, New York 10017. Notwithstanding the
foregoing, the Republic's consent to jurisdiction does not extend to actions
brought against the Republic arising out of or based upon U.S. federal
securities laws or any state securities laws, and the Consul of the Republic in
New York is not the agent for service of process relating to actions arising
out of or based upon U.S. federal securities laws or any state securities laws.
In addition, the Republic will waive its right to claim immunity for any
lawsuits brought by investors in courts present in The City of New York or in
any appropriate court in the Republic, provided that under Korean law no
execution or attachment can be issued out of any court in the Republic for
enforcing any judgment or order against any assets of the Government other than
cash assets. Such a waiver will constitute only a limited and specific waiver
for the purposes of the debt securities and under no circumstances shall it be
interpreted as a
55
general waiver by the Republic or a waiver with respect to proceedings
unrelated to the debt securities. Further, the Republic will not agree to waive
its right to immunity with regard to:
. actions brought against the Republic under U.S. federal securities laws
or any state securities laws;
. present or future "premises of the mission" as defined in the Vienna
Convention on Diplomatic Relations signed in 1961;
. "consular premises" as defined in the Vienna Convention on Consular
Relations signed in 1963; and
. any other property or assets (including property or assets for military,
governmental or public purposes) other than cash.
Thus, the Republic may assert immunity to such actions or with respect to
such property or assets. Investors may have difficulty making any claims based
upon such securities laws or enforcing judgments against the property or assets
described above.
In original actions brought before Korean courts, there is doubt as to the
enforceability of civil liabilities based on the U.S. federal securities laws.
A judgment obtained against the Republic in a foreign court having valid
jurisdiction in accordance with the international jurisdiction principles under
Korean law and applicable treaties may be recognized and enforced by the courts
of the Republic in an action brought to enforce such judgment, if:
. the judgment is final and conclusive;
. the party against whom such judgment was awarded received service of
process (other than by publication or similar means) in sufficient time
to prepare its defense in conformity with the laws of the jurisdiction of
the court rendering judgment or such party responded to the action
without being served with process;
. recognition of such judgment is not contrary to the Republic's public
policy; and
. under similar circumstances such foreign court would recognize and
enforce a comparable judgment of Korean courts.
56
LIMITATIONS ON ISSUANCE OF BEARER DEBT SECURITIES
Except as may otherwise be provided in the prospectus supplement applicable
thereto, bearer securities (including bearer securities in global form) will
not be offered, sold or delivered within the United States or its possessions
or to you, if you are a United States person, except in certain circumstances
permitted by United States tax regulations. If so specified in the applicable
prospectus supplement, bearer securities will initially be represented by one
or more temporary global securities (without interest coupons) to be deposited
with a common depositary in London for the Euroclear System and Clearstream for
credit to designated accounts. Unless otherwise indicated in the applicable
prospectus supplement:
. each such temporary global security will be exchangeable for definitive
bearer securities on or after the date that is 40 days following its
issuance only upon receipt of certification of non-United States
beneficial ownership of the temporary global security as provided for in
United States tax regulations, provided that in no event will any bearer
security be mailed or otherwise delivered to any location in the United
States in connection with such exchange; and
. any interest payable on any portion of a temporary global security with
respect to any interest payment date therefor occurring prior to the
issuance of definitive bearer securities in exchange for such temporary
global security will be paid only upon receipt of certification of
non-United States beneficial ownership of the temporary global security
as provided for in the United States tax regulations.
Bearer securities (other than temporary global debt securities) and any
related coupons will bear the following legend: "Any United States person who
holds this obligation will be subject to limitations under the United States
federal income tax laws, including the limitations provided in Sections 165(j)
and 1287(a) of the Internal Revenue Code." The sections referred to in such
legend provide that a United States person (other than a United States
financial institution described in such sections or a United States person
holding through such a financial institution) who holds a bearer security or
coupon will not be allowed to deduct any loss realized on the sale, exchange or
redemption of such bearer security and any gain (which might otherwise be
characterized as capital gain) recognized on such sale, exchange or redemption
will be treated as ordinary income.
As used herein, "U.S. holder" means an individual who is a citizen or
resident of the United States, a U.S. domestic corporation, or any other person
that is subject to U.S. federal income tax on a net income basis in respect of
its investment in a debt security.
57
TAXATION
The following discussion summarizes certain Korean and U.S. federal income
tax considerations that may be relevant to you if you invest in the debt
securities. This summary is based on laws, regulations, rulings and decisions
now in effect, which may change. Any change could apply retroactively and could
affect the continued validity of this summary.
This summary does not describe all of the tax considerations that may be
relevant to you or your situation, particularly if you are subject to special
tax rules. You should consult your tax adviser about the tax consequences of
investing in the debt securities, including the relevance to your particular
situation of the considerations discussed below, as well as of state, local or
other tax laws.
Korean Taxation
The following summary of Korean tax consideration applies to you so long as
you are not:
. a resident of Korea;
. a corporation having its head office or principal place of business in
Korea (a Korean corporation); or
. engaged in a trade or business in Korea through a permanent establishment
or a fixed base.
Interest
Under current Korean tax laws in effect, when the Republic makes payments of
interest to you on the debt securities, as long as such debt securities are
denominated in a currency other than Won, no amount will be withheld from such
payments for, or on account of, any taxes of any kind imposed, levied, withheld
or assessed by Korea or any political subdivision or taxing authority thereof
or therein.
Capital Gains
You will not be subject to any Korean income or withholding taxes in
connection with the sale, exchange or other disposition of the debt securities,
as long as such debt securities are denominated in a currency other than Won,
provided that the disposition does not involve a transfer of such debt security
to a resident of Korea or a Korean corporation (or the Korean permanent
establishment of a non-resident or a non-Korean corporation) within Korea. If
you sell or otherwise dispose of such debt securities to a Korean resident or a
Korean corporation (or the Korean permanent establishment of a non-resident or
a non-Korean corporation) and such disposition or sale is made within Korea,
any gain realized on the transaction will be taxable at ordinary Korean
withholding tax rates (the lesser of 27.5% of net gain or 11% of gross sale
proceeds with respect to transactions), unless an exemption is available under
an applicable income tax treaty. For example, if you are a resident of the
United States for the purposes of the income tax treaty currently in force
between Korea and the United States, you are generally entitled to an exemption
from Korean taxation in respect of any gain realized on a disposition of the
debt security, regardless of whether the disposition is to a Korean resident.
Stamp Taxes
You will not generally be subject to any Korean transfer tax, stamp duty or
similar documentary tax in respect of or in connection with a transfer of the
debt security.
Inheritance Tax and Gift Tax
If you die while you are the holder of the debt security, the subsequent
transfer of the debt security by way of succession will be subject to Korean
inheritance tax. Similarly, if you transfer the debt security as a gift, the
donee will be subject to Korean gift tax and you may be required to pay the
gift tax if the donee fails to do so or the donee is a non-resident.
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United States Tax Considerations
The following discussion summarizes certain U.S. federal income tax
considerations that may be relevant to you if you invest in the debt securities
and are a U.S. holder. Under the Internal Revenue Code of 1986, as amended (the
"Code"), you will be a U.S. holder if you are an individual who is a citizen or
resident of the United States, a U.S. domestic corporation, or any other person
that is subject to U.S. federal income tax on a net income basis in respect of
your investment in a debt security. This summary deals only with U.S. holders
that hold the debt securities as capital assets. This summary does not apply to
you if you are an investor that is subject to special tax rules, such as:
. a bank or thrift;
. a real estate investment trust;
. a regulated investment company;
. an insurance company;
. a dealer in securities or currencies;
. a trader in securities or commodities that elects mark to market
treatment;
. a person that will hold the debt securities as a hedge against currency
risk or as a position in a "straddle" or conversion transaction;
. a tax exempt organization; or
. a person whose "functional currency" is not the U.S. dollar.
If you are not a U.S. holder, consult the discussions under the captions
"Taxation--United States Tax Considerations--Non-U.S. Persons" and
"Taxation--United States Tax Considerations--Information Reporting and Backup
Withholding"; the remainder of this summary does not discuss the treatment of
persons that are not U.S. holders.
You should consult your tax adviser about the tax consequences of holding
the debt securities, including the relevance to your particular situation of
the considerations discussed below, as well as of state, local or other tax
laws.
Payments or Accruals of Interest
Payments or accruals of "qualified stated interest" (as defined below) on a
debt security will be taxable to you as ordinary interest income at the time
that you receive or accrue such amounts, in accordance with your regular method
of tax accounting. If you use the cash method of tax accounting and you receive
payments of interest pursuant to the terms of a debt security denominated in a
currency other than U.S. dollars (a "Foreign Currency Note"), the amount of
interest income you will realize will be the U.S. dollar value of such foreign
currency payment based on the exchange rate in effect on the date you receive
the payment regardless of whether you convert the payment into U.S. dollars. If
you are an accrual-basis U.S. holder, the amount of interest income you will
realize will be based on the average exchange rate in effect during the
interest accrual period, or with respect to an interest accrual period that
spans two taxable years, at the average exchange rate for the partial period
within the taxable year. Alternatively, as an accrual-basis U.S. holder you may
elect to translate all interest income on a Foreign Currency Note at the spot
rate on the last day of the accrual period, or the last day of the taxable
year, in the case of an accrual period that spans more than one taxable year,
or on the date that you receive the interest payment if that date is within
five business days of the end of the accrual period. If you make this election
you must apply it consistently to all debt instruments from year to year and
you cannot change the election without the consent of the Internal Revenue
Service. If you use the accrual method of accounting for tax
59
purposes you will recognize foreign currency gain or loss on the receipt of a
foreign currency interest payment if the exchange rate in effect on the date
the payment is received differs from the rate applicable to a previous accrual
of that interest income. This foreign currency gain or loss will be treated as
ordinary income or loss, but generally will not be treated as an adjustment to
interest income received on the debt security.
Interest on a debt security generally will constitute foreign source income
and generally will be considered "passive income" or "financial services"
income, which is treated separately from other types of income in computing the
foreign tax credit allowable to you under U.S. federal income tax laws.
Purchase, Sale and Retirement of Notes
Initially, your tax basis in a debt security generally will equal the cost
of the debt security to you. Your basis will increase by any amounts that you
are required to include in income under the rules governing original issue
discount and market discount, and will decrease by the amount of any amortized
premium and any payments other than qualified stated interest made on the debt
security. The rules for determining these amounts are discussed below. If you
purchase a Foreign Currency Note, the cost to you, and therefore generally your
initial tax basis, will be the U.S. dollar value of the foreign currency
purchase price on the date of purchase calculated at the exchange rate in
effect on that date. If the Foreign Currency Note is traded on an established
securities market and you are a cash-basis taxpayer, or if you are an
accrual-basis taxpayer that makes a special election, then you will determine
the U.S. dollar value of the cost of the Foreign Currency Note by translating
the amount of the foreign currency that you paid for the Note at the spot rate
of exchange on the settlement date of your purchase. The amount of any
subsequent adjustments to your tax basis in a Foreign Currency Note in respect
of original issue discount, market discount and premium will be determined in
the manner described below. If you convert U.S. dollars into a foreign currency
and then immediately use that foreign currency to purchase a Foreign Currency
Note, you generally will not have any taxable gain or loss as a result of the
purchase.
When you sell or exchange a debt security, or if a debt security is redeemed
or retired, you generally will recognize gain or loss equal to the difference
between the amount you realize on the transaction, less any accrued qualified
stated interest, which will be subject to tax in the manner described above,
and your adjusted tax basis in the debt security. If you sell or exchange a
debt security for a foreign currency, or receive foreign currency on the
redemption or retirement of a debt security, the amount you will realize for
U.S. tax purposes generally will be the dollar value of the foreign currency
that you receive calculated at the exchange rate in effect on the date such
debt security is disposed of or retired. If you dispose of a Foreign Currency
Note that is traded on an established securities market and you are a
cash-basis taxpayer, or if you are an accrual-basis taxpayer that makes a
special election, then you will determine the U.S. dollar value of the amount
realized by translating the amount at the spot rate of exchange on the
settlement date of the sale, exchange, redemption or retirement.
The special election available to you if you are an accrual-basis taxpayer
in respect of the purchase and sale of Foreign Currency Notes traded on an
established securities market, which is discussed in the two preceding
paragraphs, must be applied consistently to all debt instruments from year to
year and cannot be changed without the consent of the Internal Revenue Service.
Except as discussed below with respect to market discount and foreign
currency gain or loss, the gain or loss that you recognize on the sale,
exchange, redemption or retirement of a debt security generally will be treated
as capital gain or loss, and, if you have held the debt security for more than
one year, long-term capital gain or loss. The Code provides preferential
treatment under certain circumstances for net long-term capital gains
recognized by individual investors. Net long-term capital gain recognized by an
individual U.S. holder generally will be subject to a maximum tax rate of 20%.
The ability of U.S. holders to offset capital losses against ordinary income is
limited.
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Despite the foregoing, the gain or loss that you recognize on the sale,
exchange, redemption or retirement of a Foreign Currency Note generally will be
treated as ordinary income or loss to the extent that the gain or loss is
attributable to changes in exchange rates during the period in which you held
the Note. This foreign currency gain or loss will not be treated as an
adjustment to interest income that you receive on the Foreign Currency Note.
Original Issue Discount
If the Republic issues debt securities at a discount from their stated
redemption price at maturity, and the discount is equal to or more than the
product of one-fourth of one percent (0.25%) of the stated redemption price at
maturity of the debt securities multiplied by the number of whole years to
their maturity, the debt securities will be "Original Issue Discount Notes".
The difference between the issue price and their stated redemption price at
maturity generally will be the "original issue discount." The "issue price" of
the debt securities will be the first price at which a substantial amount of
the debt securities included in the issue of which the specified debt
securities are a part are sold to the public (i.e., excluding sales of debt
securities to underwriters, placement agents, wholesalers, or similar persons).
See "Description of the Securities--Description of the Debt Securities--Further
Issues of Debt Securities". The "stated redemption price at maturity" will
include all payments under the debt securities other than payments of qualified
stated interest. The term "qualified stated interest" generally means stated
interest that is unconditionally payable in cash or property, other than debt
instruments issued by the Republic, at least annually during the entire term of
a debt security at a single fixed interest rate or, subject to certain
conditions, based on one or more interest indices.
If you invest in Original Issue Discount Notes you generally will be subject
to the special tax accounting rules for original issue discount obligations
provided by the Code and certain Treasury regulations. You should be aware
that, as described in greater detail below, if you invest in an Original Issue
Discount Note you generally will be required to include original issue discount
in ordinary gross income for U.S. federal income tax purposes as it accrues,
before you receive the cash attributable to that income.
In general, and regardless of whether you use the cash or the accrual method
of tax accounting, if you are the holder of an Original Issue Discount Note
with a maturity greater than one year, you will be required to include in
ordinary gross income the sum of the "daily portions" of original issue
discount on that debt security for all days during the taxable year that you
own the debt security. The daily portions of original issue discount on an
Original Issue Discount Note are determined by allocating to each day in any
accrual period a ratable portion of the original issue discount allocable to
that period. Accrual periods may be any length and may vary in length over the
term of an Original Issue Discount Note, so long as no accrual period is longer
than one year and each scheduled payment of principal or interest occurs on the
first or last day of an accrual period. If you are the initial holder of the
debt security, the amount of original issue discount on an Original Issue
Discount Note allocable to each accrual period is determined by:
(i) multiplying the "adjusted issue price" (as defined below) of the debt
security at the beginning of the accrual period by a fraction, the
numerator of which is the annual yield to maturity of the debt security
and the denominator of which is the number of accrual periods in a year;
and
(ii) subtracting from that product the amount, if any, payable as qualified
stated interest allocable to that accrual period.
In the case of an Original Issue Discount Note that is a floating rate debt
security, both the "annual yield to maturity" and the qualified stated interest
will be determined for these purposes as though the debt security had borne
interest in all periods at a fixed rate generally equal to the rate that would
be applicable to interest payments on the debt security on its date of issue
or, in the case of some floating rate debt securities, the rate that reflects
the yield that is reasonably expected for the debt security. Additional rules
may apply if interest on a floating rate debt security is based on more than
one interest index. The "adjusted issue price" of an Original
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Issue Discount Note at the beginning of any accrual period will generally be
the sum of its issue price, including any accrued interest, and the amount of
original issue discount allocable to all prior accrual periods, reduced by the
amount of all payments other than any qualified stated interest payments on the
debt security in all prior accrual periods. All payments on an Original Issue
Discount Note, other than qualified stated interest, will generally be viewed
first as payments of previously accrued original issue discount, to the extent
of the previously accrued discount, with payments considered made from the
earliest accrual periods first, and then as a payment of principal. The "annual
yield to maturity" of a debt security is the discount rate, appropriately
adjusted to reflect the length of accrual periods, that causes the present
value on the issue date of all payments on the debt security to equal the issue
price. As a result of this "constant yield" method of including original issue
discount income, the amounts you will be required to include in your gross
income if you invest in an Original Issue Discount Note denominated in U.S.
dollars will generally be less in the early years and greater in the later
years than amounts that would be includible on a straight-line basis.
You generally may make an irrevocable election to include in income your
entire return on a debt security (i.e., the excess of all remaining payments to
be received on the debt security, including payments of qualified stated
interest, over the amount you paid for the debt security) under the constant
yield method described above. For debt securities purchased at a premium or
bearing market discount in your hands, if you make this election you will also
be deemed to have made the election (discussed under "Taxation--United States
Tax Considerations--Premium and Market Discount") to amortize premium or to
accrue market discount in income currently on a constant yield basis.
In the case of an Original Issue Discount Note that is also a Foreign
Currency Note, you should determine the U.S. dollar amount includible as
original issue discount for each accrual period by (i) calculating the amount
of original issue discount allocable to each accrual period in the foreign
currency using the constant yield method, and (ii) translating the foreign
currency amount so determined at the average exchange rate in effect during
that accrual period, or, with respect to an interest accrual period that spans
two taxable years, at the average exchange rate for each partial period.
Alternatively, you may translate the foreign currency amount so determined at
the spot rate of exchange on the last day of the accrual period, or the last
day of the taxable year, for an accrual period that spans two taxable years, or
at the spot rate of exchange on the date of receipt, if that date is within
five business days of the last day of the accrual period, provided that you
have made the election described under the caption "Payments or Accruals of
Interest and Additional Amounts" above. Because exchange rates may fluctuate,
if you are the holder of an Original Issue Discount Note that is also a Foreign
Currency Note you may recognize a different amount of original issue discount
income in each accrual period than would be the case if you were the holder of
an otherwise similar Original Issue Discount Note denominated in U.S. dollars.
Upon the receipt of an amount attributable to original issue discount, whether
in connection with a payment of an amount that is not qualified stated interest
or the sale or retirement of the Original Issue Discount Note that is also a
Foreign Currency Note, you will recognize ordinary income or loss measured by
the difference between the amount received, translated into U.S. dollars at the
exchange rate in effect on the date of receipt or on the date of disposition of
such Original Issue Discount Note, as the case may be, and the amount accrued,
using the exchange rate applicable to such previous accrual.
If you purchase an Original Issue Discount Note outside of the initial
offering at a cost less than its "remaining redemption amount", or if you
purchase an Original Issue Discount Note in the initial offering at a price
other than such Note's issue price, you will also generally be required to
include in gross income the daily portions of original issue discount,
calculated as described above. However, if you acquire an Original Issue
Discount Note at a price greater than its adjusted issue price, you will be
entitled to reduce your periodic inclusions of original issue discount to
reflect the premium paid over the adjusted issue price. The remaining
redemption amount for an Original Issue Discount Note is the total of all
future payments to be made on the Note other than qualified stated interest.
Certain of the Original Issue Discount Notes may be redeemed prior to
Maturity, either at the Republic's option or at the option of the holder, or
may have special repayment or interest rate reset features as indicated in
62
the prospectus supplement. Original Issue Discount Notes containing these
features may be subject to rules that differ from the general rules discussed
above. If you purchase Original Issue Discount Notes with these features, you
should carefully examine the prospectus supplement and consult your tax adviser
about their treatment since the tax consequences of original issue discount
will depend, in part, on the particular terms and features of the debt
securities.
Short-Term Debt Securities
The rules described above will also generally apply to Original Issue
Discount Notes with maturities of one year or less ("short-term debt
securities"), but with some modifications.
First, the original issue discount rules treat none of the interest on a
short-term debt security as qualified stated interest, but treat a short-term
debt security as having original issue discount. Thus, all short-term debt
securities will be Original Issue Discount Notes. Except as noted below, if you
are a cash-basis U.S. holder of a short-term debt security and you do not
identify the short-term debt security as part of a hedging transaction you will
generally not be required to accrue original issue discount currently, but you
will be required to treat any gain realized on a sale, exchange, redemption or
retirement of the debt security as ordinary income to the extent such gain does
not exceed the original issue discount accrued with respect to the debt
security during the period you held the debt security. You may not be allowed
to deduct all of the interest paid or accrued on any indebtedness incurred or
maintained to purchase or carry a short-term debt security until the maturity
of the debt security or its earlier disposition in a taxable transaction.
Notwithstanding the foregoing, if you are a cash-basis U.S. holder of a
short-term debt security you may elect to accrue original issue discount on a
current basis, in which case the limitation on the deductibility of interest
described above will not apply. A U.S. holder using the accrual method of tax
accounting and some cash method holders, including banks, securities dealers,
regulated investment companies and certain trust funds, generally will be
required to include original issue discount on a short-term debt security in
gross income on a current basis. Original issue discount will be treated as
accruing for these purposes on a ratable basis or, at the election of the
holder, on a constant yield basis based on daily compounding.
Second, regardless of whether you are a cash- or accrual-basis holder, if
you are the holder of a short-term debt security you can elect to accrue any
"acquisition discount" with respect to the debt security on a current basis.
Acquisition discount is the excess of the remaining redemption amount of the
debt security at the time of acquisition over the purchase price. Acquisition
discount will be treated as accruing ratably or, at the election of the holder,
under a constant yield method based on daily compounding. If you elect to
accrue acquisition discount, the original issue discount rules will not apply.
Finally, the market discount rules described below will not apply to
short-term debt securities.
As described above, certain of the debt securities may be subject to special
redemption features. These features may affect the determination of whether a
debt security has a maturity of one year or less and thus is a short-term debt
security. If you purchase debt securities with these features, you should
carefully examine the prospectus supplement and consult your tax adviser about
these features.
Premium and Market Discount
If you purchase a debt security at a cost greater than the debt security's
remaining redemption amount, you will be considered to have purchased the debt
security at a premium, and you may elect to amortize the premium as an offset
to interest income, using a constant yield method, over the remaining term of
the debt security. If you make this election, it generally will apply to all
debt instruments that you hold at the time of the election, as well as any debt
instruments that you subsequently acquire. In addition, you may not revoke the
election without the consent of the Internal Revenue Service. If you elect to
amortize the premium you will be required to reduce your
63
tax basis in the debt security by the amount of the premium amortized during
your holding period. Original Issue Discount Notes purchased at a premium will
not be subject to the original issue discount rules described above. In the
case of premium on a Foreign Currency Note, you should calculate the
amortization of the premium in the foreign currency. Amortization deductions
attributable to a period reduce interest payments in respect of that period,
and therefore are translated into U.S. dollars at the rate that you use for
those interest payments. Exchange gain or loss will be realized with respect to
amortized premium on a Foreign Currency Note based on the difference between
the exchange rate computed on the date or dates the premium is amortized
against interest payments on the Note and the exchange rate on the date when
the holder acquired the Note. For a U.S. holder that does not elect to amortize
premium, the amount of premium will be included in your tax basis when the debt
security matures or is disposed of. Therefore, if you do not elect to amortize
premium and you hold the debt security to maturity, you generally will be
required to treat the premium as capital loss when the debt security matures.
If you purchase a debt security at a price that is lower than the debt
security's remaining redemption amount, or in the case of an Original Issue
Discount Note, the debt security's adjusted issue price, by 0.25% or more of
the remaining redemption amount, or adjusted issue price, multiplied by the
number of remaining whole years to maturity, the debt security will be
considered to bear "market discount" in your hands. In this case, any gain that
you realize on the disposition of the debt security generally will be treated
as ordinary interest income to the extent of the market discount that accrued
on the debt security during your holding period. In addition, you could be
required to defer the deduction of a portion of the interest paid on any
indebtedness that you incurred or continued to purchase or carry the debt
security. In general, market discount will be treated as accruing ratably over
the term of the debt security, or, at your election, under a constant yield
method. You must accrue market discount on a Foreign Currency Note in the
specified currency. The amount that you will be required to include in income
in respect of accrued market discount will be the U.S. dollar value of the
accrued amount, generally calculated at the exchange rate in effect on the date
that you dispose of the Foreign Currency Note.
You may elect to include market discount in gross income currently as it
accrues (on either a ratable or constant yield basis), in lieu of treating a
portion of any gain realized on a sale of the debt security as ordinary income.
If you elect to include market discount on a current basis, the interest
deduction deferral rule described above will not apply. If you do make such an
election, it will apply to all market discount debt instruments that you
acquire on or after the first day of the first taxable year to which the
election applies. The election may not be revoked without the consent of the
Internal Revenue Service. Any accrued market discount on a Foreign Currency
Note that is currently includible in income will be translated into U.S.
dollars at the average exchange rate for the accrual period (or portion thereof
within the holder's taxable year).
Indexed Notes and Other Notes Providing for Contingent Payment
Special rules govern the tax treatment of debt obligations that provide for
contingent payments ("contingent debt obligations"). These rules generally
require accrual of interest income on a constant yield basis in respect of
contingent debt obligations at a yield determined at the time of issuance of
the obligation, and may require adjustments to these accruals when any
contingent payments are made. In addition, special rules may apply to floating
rate debt securities if the interest payable on the debt securities is based on
more than one interest index. The Republic will provide a detailed description
of the tax considerations relevant to U.S. holders of any debt securities that
are subject to the special rules discussed in this paragraph in the relevant
prospectus supplement.
Non-U.S. Persons
The following summary applies to you if you are not a United States person
for U.S. federal income tax purposes. You are a United States person, and
therefore this summary does not apply to you, if you are:
. a citizen or resident of the United States or its territories,
possessions or other areas subject to its jurisdiction;
64
. a corporation, partnership or other entity organized under the laws of
the United States or any political subdivision thereof; or
. an estate or trust the income of which is subject to United States
federal income taxation regardless of its source.
If you are not a United States person, the interest income and gains that
you derive in respect of the debt securities generally will be exempt from
United States federal income taxes, including withholding tax. However, to
receive this exemption you may be required to satisfy certain certification
requirements of the United States Internal Revenue Service to establish that
you are not a United States person. See "Taxation--United States Tax
Considerations--Information Reporting and Backup Withholding".
Even if you are not a United States person, you may still be subject to
United States federal income taxes on any interest income you derive in respect
of the debt securities if:
. you are an insurance company carrying on a United States insurance
business, within the meaning of the Code; or
. you have an office or other fixed place of business in the United States
to which the interest is attributable and (1) you earn the interest in
the course of operating a banking, financing or similar business in the
United States or (2) you are a corporation the principal business of
which is trading in stock or securities for its own account, and certain
other conditions exist.
If you are not a United States person, any gain you realize on a sale or
exchange of debt securities generally will be exempt from United States federal
income tax, including withholding tax, unless:
. your gain is effectively connected with your conduct of a trade or
business in the United States; or
. you are an individual holder and are present in the United States for 183
days or more in the taxable year of the sale, and either (1) your gain is
attributable to an office or other fixed place of business that you
maintain in the United States or (2) you have a tax home in the United
States.
A debt security held by an individual holder who at the time of death is a
non-resident alien will not be subject to United States federal estate tax.
Information Reporting and Backup Withholding
The paying agent must file information returns with the United States
Internal Revenue Service in connection with debt security payments made to
certain United States persons. If you are a United States person, you generally
will not be subject to United States backup withholding tax on such payments if
you provide your taxpayer identification number to the paying agent, certify as
to no loss of exemption from backup withholding and otherwise comply with
applicable requirements of the backup withholding rules. You may also be
subject to information reporting and backup withholding tax requirements with
respect to the proceeds from a sale of the debt securities. If you are not a
United States person, in order to avoid information reporting and backup
withholding tax requirements you may have to comply with certification
procedures to establish that you are not a United States person.
65
PLAN OF DISTRIBUTION
The Republic may sell the debt securities in any of three ways:
. through underwriters or dealers;
. directly to one or more purchasers; or
. through agents.
The prospectus supplement relating to a particular series of debt securities
will state:
. the names of any underwriters;
. the purchase price of the securities;
. the proceeds to the Republic from the sale;
. any underwriting discounts and other items constituting underwriters'
compensation;
. any agent commissions or other items constituting agents' compensation;
. the initial public offering price;
. any discounts or concessions allowed or paid to dealers; and
. any securities exchanges on which the securities will be listed.
Any underwriter involved in the sale of securities will acquire the debt
securities for its own account. The underwriters may resell the debt securities
from time to time in one or more transactions, including negotiated
transactions, at a fixed public offering price or at varying prices to be
determined at the time of sale. The debt securities may be offered to the
public either by underwriting syndicates represented by managing underwriters
or by underwriters without a syndicate. Unless the prospectus supplement states
otherwise, certain conditions must be satisfied before the underwriters become
obligated to purchase securities from the Republic, and they will be obligated
to purchase all of the debt securities if any are purchased. The underwriters
may from time to time change any initial public offering price and any
discounts or concessions allowed or reallowed or paid to dealers.
If the Republic sells debt securities through agents, the prospectus
supplement will identify the agent and indicate any commissions payable by the
Republic. Unless the prospectus supplement states otherwise, all agents will
act on a best efforts basis and will not acquire the debt securities for their
own account.
The Republic may authorize agents, underwriters or dealers to solicit offers
by certain specified entities to purchase the securities from the Republic at
the public offering price set forth in a prospectus supplement pursuant to
delayed delivery contracts. The prospectus supplement will set out the
conditions of the delayed delivery contracts and the commission receivable by
the agents, underwriters or dealers for soliciting the contracts.
The Republic may offer debt securities as consideration for the purchase of
other of the Republic's debt securities, either in connection with a publicly
announced tender offer or in privately negotiated transactions. The offer may
be in addition to or in lieu of sales of debt securities directly or through
underwriters or agents.
Agents and underwriters may be entitled to indemnification by the Republic
against certain liabilities, including liabilities under the Securities Act of
1933, as amended, (the "Securities Act") or to contribution from the Republic
with respect to certain payments which the agents or underwriters may be
required to make. Agents and underwriters may be customers of, engage in
transactions with, or perform services (including commercial and investment
banking services) for, the Republic.
66
LEGAL MATTERS
The validity of any particular series of debt securities will be passed upon
for the Republic and any underwriters or agents by United States and Korean
counsel identified in the related prospectus supplement.
AUTHORIZED REPRESENTATIVES IN THE UNITED STATES
The authorized representative of the Republic in the United States is Mr.
Hi-Su Lee, Consul, Korean Consulate General in New York, located at 335 East
45/th/ Street, New York, New York 10017.
OFFICIAL STATEMENTS AND DOCUMENTS
The Minister of Finance and Economy of The Republic of Korea, in his
official capacity, has supplied the information set out under "The Republic of
Korea". Such information is stated on his authority. The documents identified
in the portion of this prospectus captioned "The Republic of Korea" as the
sources of financial or statistical data are official public documents of the
Republic or its agencies and instrumentalities.
FORWARD-LOOKING STATEMENTS
This prospectus and any prospectus supplement relating to the securities to
be offered by this prospectus may contain future expectations, projections or
"forward-looking statements", as defined in Section 27A of the Securities Act,
and Section 21E of the Securities Exchange Act of 1934, as amended. The words
"believe", "expect", "anticipate", "estimate", "project" and similar words
identify forward-looking statements. In addition, all statements other than
statements of historical facts included in this prospectus are forward-looking
statements. Although the Republic believes that the expectations reflected in
the forward-looking statements are reasonable, the Republic can give no
assurance that such expectations will prove correct. This prospectus discloses
important factors that could cause actual results to differ materially from the
Republic's expectations ("Cautionary Statements"). All subsequent written and
oral forward-looking statements attributable to the Republic or persons acting
on the Republic's behalf are expressly qualified in their entirety by the
Cautionary Statements.
Factors that could adversely affect the future performance of the Korean
economy include:
. a deterioration of the Korean consumer or corporate sector;
. a failure of the restructuring of large troubled chaebols or companies;
. an increase in non-performing assets or default rates relating to, among
others, loans extended by financial institutions to the retail sector;
. an increase in lay-offs or unemployment rates or a reduction in income
levels, which could adversely affect consumer spending or lead to social
or labor unrest;
. a decrease in tax revenues and a substantial increase in the Government's
expenditures for unemployment compensation and other social programs that
together lead to an increased Government budget deficit;
. political uncertainty or increasing strife among and within political
parties in the Republic;
. adverse changes or volatility in commodity prices (including an increase
in oil prices), exchange rates, interest rates, stock markets or foreign
currency reserves;
. increased reliance on exports to service foreign currency debts, which
could cause friction with the Republic's trading partners;
. adverse developments in the economies of countries to which the Republic
exports, such as the United States, China and Japan, or in emerging
market economies in Asia, including China, or elsewhere that result in a
loss of confidence in the Korean economy;
67
. the continued emergence of China, to the extent its benefits (such as
increased exports to China) are outweighed by its costs (such as
competition in export markets or for foreign investment);
. a deterioration in economic or diplomatic relations between the Republic
and its trading partners or allies, including as a result of trade
disputes or disagreements in foreign policy; and
. an increase in the level of tensions or an outbreak of hostilities in the
Korean peninsula or elsewhere in the world, including the Middle East.
FURTHER INFORMATION
The Republic filed a registration statement with respect to the securities
with the Securities and Exchange Commission under the Securities Act, and its
related rules and regulations. You can find additional information concerning
the Republic and the securities in the registration statement and any pre- or
post-effective amendment, including its various exhibits, which may be
inspected at the public reference facilities maintained by the Securities and
Exchange Commission at Room 1024, 450 Fifth Street N.W., Washington, D.C. 20549.
68
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
Item 11. Estimated Expenses.
It is estimated that our expenses in connection with the sale of the debt
securities and warrants hereunder, exclusive of compensation payable to
underwriters and agents, will be as follows:
SEC Registration Fee................................................................ US$1,475,000
NASD Filing Fee..................................................................... 30,500
Printing Costs...................................................................... 200,000
Legal Fees and Expenses............................................................. 1,000,000
Fiscal Agent Fees and Expenses...................................................... 10,000
Blue Sky Fees and Expenses.......................................................... 25,000
Miscellaneous (including amounts to be paid to underwriters in lieu of reimbursement
of certain expenses).............................................................. 259,500
------------
Total.............................................................................. US$3,000,000
============
UNDERTAKINGS
The Registrant hereby undertakes:
(a) to file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement:
(i) to include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933, as amended (the "Act");
(ii) to reflect in the prospectus any facts or events arising after the
effective date of this Registration Statement (or the most recent
post-effective amendment thereto) which, individually or in the aggregate,
represent a fundamental change in the information set forth in this
Registration Statement; and
(iii) to include any material information with respect to the plan of
distribution not previously disclosed in this Registration Statement or any
material change to such information in this Registration Statement;
(b) that, for the purpose of determining any liability under the Act, each
such post-effective amendment shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof; and
(c) to remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of
the offering.
(d) for purposes of determining any liability under the Act, the
information omitted from the form
of prospectus filed as part of this Registration Statement in reliance upon
Rule 430A and contained in a form of prospectus filed by the Registrant
pursuant to Rule 424(b)(1) or (4) or Rule 497(h) under the Act shall be deemed
to be part of this Registration Statement as of the time it was declared
effective.
(e) for the purpose of determining any liability under the Act, each
post-effective amendment that contains a form of prospectus shall be deemed to
be a new Registration Statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
II-1
CONTENTS OF POST-EFFECTIVE AMENDMENT NO. 1
TO THE REGISTRATION STATEMENT
This Post-Effective Amendment No. 1 to the Registration Statement consists of:
(1) Facing Page.
(2) Explanatory Note.
(3) Part I, consisting of the prospectus.
(4) Part II, consisting of pages numbered II-1 through II-5.
(5) The following exhibits:
A -- Form of Underwriting Agreement.*
B-1 -- Form of Fiscal Agency Agreement.*
B-2 -- Form of global Debt Security (attached to the Form of Fiscal Agency Agreement
under B-1 above).*
C -- Opinion (including consent) of Kim & Chang, Seyang Building, 223 Naeja-
dong, Chongro-gu, Seoul 110-720, The Republic of Korea, Korean counsel to
The Republic of Korea, in respect of the legality of the Debt Securities.*
D -- Opinion (including consent) of Cleary, Gottlieb, Steen & Hamilton, Bank of
China Tower, One Garden Road, Hong Kong, United States counsel to The
Republic of Korea, in respect of the legality of the Debt Securities.*
E-1 -- Consent of the Minister of Finance and Economy of The Republic
of Korea (included on Page II-4).
E-2 -- Power of Attorney of the Minister of Finance and Economy of The
Republic of Korea.*
F -- Letter appointing Authorized Representative of The Republic of Korea in the
United States.*
- --------
* Previously filed.
II-2
SIGNATURE OF THE REPUBLIC OF KOREA
Pursuant to the requirements of the U.S. Securities Act of 1933, as amended,
The Republic of Korea has duly caused this Registration Statement or amendment
thereto to be signed on its behalf by the undersigned, thereunto duly
authorized, in The City of New York, New York, on the 7th day of February 2003.
For and on behalf of
THE REPUBLIC OF KOREA
By: YUN-CHURL JEON *+
-----------------------------
Minister of Finance and
Economy
+By: /s/ HI-SU LEE
----------------------------
Hi-Su Lee
Attorney-in-Fact
- --------
* Consent is hereby given to use of his name in connection with the
information specified in this Registration Statement or amendment thereto to
have been supplied by him and stated on his authority.
II-3
SIGNATURE OF AUTHORIZED REPRESENTATIVE OF THE REPUBLIC OF KOREA
Pursuant to the U.S. Securities Act of 1933, as amended, the undersigned, a
duly authorized representative of The Republic of Korea in the United States,
has signed this Registration Statement or amendment thereto in The City of New
York, on the 7th day of February 2003.
By: /s/ HI-SU LEE
-----------------------------
Hi-Su Lee
Consul,
Korean Consulate General in
New York
II-4
EXHIBIT INDEX
Page
Exhibit Description No.
- ------- ----------- ----
A Form of Underwriting Agreement.*
B-1 Form of Fiscal Agency Agreement.*
B-2 Form of global Debt Security (attached to the Form of Fiscal Agency Agreement under B-1
above).*
C Opinion (including consent) of Kim & Chang, Seyang Building, 223 Naeja-dong, Chongro-gu,
Seoul 110-720, The Republic of Korea, Korean counsel to The Republic of Korea, in respect of
the legality of the Debt Securities.*
D Opinion (including consent) of Cleary, Gottlieb, Steen & Hamilton, Bank of China Tower, One
Garden Road, Hong Kong, United States counsel to The Republic of Korea, in respect of the
legality of the Debt Securities.*
E-1 Consent of the Minister of Finance and Economy of The Republic of Korea (included on Page
II-4).
E-2 Power of Attorney of the Minister of Finance and Economy of The Republic of Korea.*
F Letter appointing Authorized Representative of The Republic of Korea in the United States.*
- --------
* Previously filed.